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DRAM: The Key to Playing the AI Theme
According to analysts, one corner of the semiconductor sector that is particularly bullish in playing the artificial intelligence theme is DRAM, or dynamic random access memory. DRAM is a type of semiconductor memory needed for data processing. As the use of AI grows, more and more memory is required; indeed, Morgan Stanley called memory the foundational building blocks of artificial intelligence.
Investors Are Underestimating AI’s Impact on the Memory Segment
Memory is a cheaper way to play the start of AI’s explosive new decade-long growth phase, said Morgan Stanley in a May 29 report, adding that investors are underestimating the impact of AI on the memory segment. Analysts have also highlighted that there’s more upside for the prices of DRAM-related stocks due to production cuts.
DRAM-Related Stocks Are Poised to Rise
According to Henry Mallari-D’Auria, chief investment officer of emerging markets value at Ariel Investments, top DRAM producers have lowered their production by 20-30%, and their capital expenditure plans by as much as 50%. Meanwhile, the demand outlook is starting to improve as customer inventory levels have come down. AI servers use four times as much DRAM as normal servers, said Mallari-D’Auria, adding that they are set to grow from a mid-single-digit portion of total DRAM revenues to the mid-teens over the next few years.
DDR5 Demand Is Rapidly Increasing
Citi in a May 30 note said that it was raising the outlook for DRAM average selling prices on the back of the production cuts and solid penetration growth in DDR5—a type of DRAM. Considering additional DDR5 demand from Microsoft and Google, we expect DDR5 penetration will rapidly increase throughout the year.
Nvidia’s Dominance in the AI Buzz
Nvidia has been at the center of the AI buzz, and it recently reported much better-than-expected results and a huge forecast beat driven by strong AI demand. The firm dominates the market for graphics processing units, or GPUs, which are used to speed up AI processes.
Nvidia and HBM
Nvidia is driving demand for the high bandwidth memory (HBM) segment in the DRAM sector, according to analysts. It’s a key component needed to run Nvidia’s AI processors such as A100 AND H100—something that regular DRAM cannot do, said Bank of America in a June 1 report. In fact, Nvidia’s competitors AMD, Intel, and even some Chinese fabless firms are also promoting AI GPUs, suggesting increased new high bandwidth memory orders.
SK Hynix: A Top Pick in the DRAM Space
South Korean chipmaker SK Hynix is a favorite among analysts in the DRAM space. Morgan Stanley named it as a top pick and said it was a key beneficiary of NVDA’s AI opportunity, while both Bank of America and Citi are bullish on the stock. Mallari-D’Auria also believes SK Hynix is well positioned to benefit from AI. The Korean company is the largest pure-play memory producer in the world and has a particularly strong position in the high-end DRAM products which are used in AI servers, he said.
Samsung Electronics: Another Top Pick
Another top pick for both Morgan Stanley and Citi is Samsung Electronics. The former gave it a price target of 90,000 Korean won, representing potential upside of 25%. Morgan Stanley says Samsung is an indirect beneficiary of tighter supply driven by AI GPU and server demand. Expectations are down and valuation is near historical lows, which sets the stock up nicely.
Combined Market Share of Samsung and SK Hynix
Samsung and SK Hynix had a combined market share of DRAM of around 70%-80% in 2020, according to Bank of America.
Conclusion
DRAM, or dynamic random access memory, is a key component in the development of artificial intelligence. AI servers require four times as much DRAM as normal servers, which means that the demand for this type of semiconductor memory is set to grow from a mid-single-digit portion of total DRAM revenues to the mid-teens over the next few years. Analysts are bullish on DRAM-related stocks, with SK Hynix and Samsung Electronics named the top picks by several firms. These stocks are poised to rise due to production cuts, solid penetration growth in DDR5, and increasing demand from Nvidia, Microsoft, Google, and other competitors in the AI space.
FAQs
Q: What is DRAM?
A: DRAM (or dynamic random access memory) is a type of semiconductor memory needed for data processing.
Q: Why is DRAM important in artificial intelligence?
A: As the use of AI grows, more and more memory is required. Memory is seen as the foundational building blocks of artificial intelligence, according to Morgan Stanley.
Q: Why are analysts bullish on DRAM-related stocks?
A: Analysts have highlighted that there’s more upside for the prices of DRAM-related stocks due to production cuts, solid penetration growth in DDR5, and increasing demand from Nvidia, Microsoft, Google, and other competitors in the AI space.
Q: Who are the top picks for DRAM-related stocks?
A: According to firms like Morgan Stanley, Bank of America, and Citi, South Korean chipmakers SK Hynix and Samsung Electronics are the top picks in the DRAM space.
Q: What is the market share of Samsung and SK Hynix in the DRAM space?
A: Samsung and SK Hynix had a combined market share of DRAM of around 70%-80% in 2020, according to Bank of America.
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