Semiconductor cyclicality threatens memory makers
The guest argued that memory chip makers face a painful capital cycle downturn once supply catches up to AI demand, despite current assumptions that AI has permanently eliminated their cyclicality.
The argument
Memory chips historically behave like commodities, and the massive capital cycle currently underway will eventually lead to oversupply. When the cycle turns, these companies will likely look cheap on a trailing price-to-earnings basis but turn out to be poor investments.
The thesis, stress-tested
✓ What validates it
- ✓An oversupply of high-bandwidth memory leading to declining average selling prices
- ✓Micron's trailing PE ratio dropping significantly while operating margins compress
▸ Risks discussed
- ▸The AI demand super-cycle could last much longer than historical commodity cycles
- ▸Industry consolidation could prevent severe price wars during the next downturn
Hear it yourself
"So one other crucial thing that was going on in 2000 was the average risk asset looked much better than the half weighted stock market. So if you were prepared to own a risk asset portfolio that looked different from the market, you could make a lot more money that way. In 2007, you couldn't. That equal weighted, portfolio of risk assets looked almost exactly the same as the cap weighted portfolio, so you couldn't diversify your way out of the pain. You needed to move up that line. You needed to move towards the origin. Now in one sense, like, an optimizer would say, well, that's easy."
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