Samsung’s plan to cut memory chip production signals a potentially sooner-than-expected recovery for the broader memory chip market, according to Wall Street. In conjunction with preliminary results pointing to a 96% drop in quarterly profit, the South Korea-based electronics company said Friday it plans to cut production of two types of memory known as DRAM and NAND flash, as it grapples with slowing global growth, dwindling demand and oversupply. Investors seemed to laud the news, sending shares of Micron Technology and Western Digital up about 8% each on Monday. Wall Street analysts also viewed some green shoots, with Wells Fargo’s Aaron Rakers calling the announcement and subsequent stock reaction a sign of “increasing confidence of down-cycle bottom.” MU 1D mountain Micron shares rally on Samsung production cut Memory chipmakers and the broader semiconductor sector faced a rocky few years as skyrocketing demand from the pandemic dwindled and crippling inflation coupled with high interest rates hampered demand for some discretionary products. Semiconductor stocks have bounced this year after a tough 2022. The VanEck Semiconductor ETF (SMH) , which tracks the sector, is up nearly 25% tear to date, while Micron has rallied about 27%. Despite previous market expectations for the Samsung pivot, Goldman Sachs analyst Toshiya Hari called news of the cuts a “positive surprise” for Micron and lifted his price target to $70 from $65 a share. The new target implies about 20% upside from Thursday’s close. SMH YTD mountain Shares so far in 2023 “While we acknowledge that the severity of the current downturn raises questions regarding the historical bull case predicated on the industry achieving ‘higher highs and higher lows’, we believe ongoing, unprecedented and broad-based production cuts — which now includes participation from the industry’s largest producer, Samsung — coupled with stabilization in the demand environment will drive a recovery in fundamentals in 2024 that exceed current Street consensus,” he wrote. Citi analyst Christopher Danely called the news a “huge positive” for the dynamic random access memory, or DRAM, industry. Combined with the production and capital expenditure cuts from Micron and SK Hynix —and stabilizing demand for data centers, handsets and PCs — Danely anticipates a recovery starting in the second half of 2023. Elsewhere, KeyBanc Capital Markets’ John Vinh said the cuts should fuel “a quicker return to supply-demand balance,” eliminate investor concerns of “irrational supply behavior” and boost confidence in “disciplined capex investments in memory.” Adding ‘lights to the tunnel’ Given Samsung’s more than 40% share of the DRAM and NAND memory markets, Stifel’s Brian Chin said in a Monday note that the move “adds light to the tunnel” and symbolizes the “type of supply capitulation we have advocated for to help turnaround the largest memory supply imbalance in decades.” But while the cuts from Samsung should help ease some pricing pressures, caveats persist, with Morgan Stanley’s Joseph Moore expecting a “fairly muted” upturn from the production cuts and slow margin recovery even in 2024. “Investors are much more excited than industry contacts around this, given obvious green shoots implied from production cuts,” he wrote. “But in our view this situation is so much different from anything in recent history and we wouldn’t just follow the traditional playbook, especially for MU, which starts at a premium valuation to anything historically in any instance other than a peak scenario.” Given this backdrop, Moore remains cautious on Micron, while viewing Western Digital as better positioned for more upside in a longer-term upturn given its undervalued NAND business. — CNBC’s Michael Bloom contributed reporting
