BofA: Memory cycle bids farewell to "J-shaped" growth, but fundamental upside remains huge; chip shortage may persist until 2027.

In a research report recently released, BofA pointed out that as the fourth quarter of 2026 approaches, the memory cycle will gradually move out of its previous J-shaped growth phase and enter a new stage of development. This is consistent with Micron Technology, Inc.'s (MU.US) recently announced results and latest guidance: fiscal 2026 fourth-quarter sales rose 31% quarter over quarter, lower than the 74% increase in the third fiscal quarter; the company expects fiscal 2027 first-quarter sales to rise only 13.5% quarter over quarter. This trend could be used to build a bearish case for the memory industry, but BofA believes the fundamental upside remains substantial, mainly for three reasons: 1) high margins despite the sharp decline in quarter-over-quarter sales growth and higher employee incentive costs, Micron still expects gross margin to reach 86% in the first quarter of fiscal 2027; 2) low price-to-earnings (P/E) multiples even based on expected 2028 earnings per share, most memory stocks trade at only 5-7x P/E; 3) record share buybacks or cash dividends. Like Asian memory chipmakers, Micron also appears to believe that, despite more wafer fabs coming online in Asia and the United States, the memory chip shortage may continue to intensify through 2027 relative to new chip demand. BofA said that, overall, as long as sales/operating profit can remain at 10 times the peak levels of the 2018 and 2021 upcycles, slower growth should not be a concern, and Micron's results and guidance have already provided evidence of this. Similarities and differences: Micron vs. Samsung/SK Hynix BofA also learned that Micron's six strategies are broadly consistent with those of Samsung Electronics and SK Hynix, including: 1) actively returning capital to shareholders; 2) increasing long-term agreements (LTAs) while further diversifying the customer base, including large technology companies and original equipment manufacturers (OEMs); 3) building new wafer fabs, but wafer capacity expansion is constrained by longer manufacturing cycles; 4) chip supply remains insufficient relative to long-term demand; 5) average selling prices (ASP) remain stable, with revenue growth driven more by volume rather than aggressive increases in DRAM/NAND prices; 6) placing a high priority on high-bandwidth memory (HBM), with large-scale capacity expansion relative to conventional DRAM, while ASP increases for 2027 annual contracts are also more pronounced. However, there are still differences in companies' earnings performance and business outlook third-quarter DRAM ASP quarter over quarter: Samsung/SK Hynix are expected to rise 23%-25%, while Micron is expected to rise in the high teens; third-quarter NAND ASP quarter over quarter: Samsung/SK Hynix are expected to rise 15%-18%, while Micron is expected to rise about 30%. In terms of payout ratio, Samsung is currently at 50% of free cash flow (FCF); SK Hynix is above 50%; Micron will achieve a 100% payout ratio after reaching a specific target cash balance, which is expected to be achieved in the November 2026 quarter, while its cash balance in the August 2026 quarter was $75 billion; LTA share of long-term sales through 2030: Samsung 60%-70%; SK Hynix more than 50%; Micron more than 35%. In addition, regarding migration to the 1c (Gamma) process node, Samsung has not yet used it for DDR5 and remains focused on HBM4; SK Hynix has already used it for mainstream production of high-end DDR5; Micron has clearly stated that 1c is its largest production process node. HBM, DDR5 and rush orders drive strong growth in South Korea's September semiconductor exports South Korea's September semiconductor exports rose sharply, up 29% quarter over quarter and 263% year over year. BofA believes there are three main DRIVEs: 1) the successful acceleration of HBM4 mass production, which now accounts for more than 50% of total HBM sales; 2) despite increasing long-term agreements, DDR5 prices still rose more than 20%-30% from the previous quarter; 3) an increase in rush orders at quarter-end, including enterprise solid-state drive (eSSD)/NAND orders. Combining the July, August and September export data, it also shows strong third-quarter growth, up 30% quarter over quarter, broadly in line with BofA's forecasts for SK Hynix's and Samsung's third-quarter memory chip revenue the bank expects SK Hynix's memory chip revenue to grow 32%, while Samsung's grows 27%. Samsung's third-quarter preliminary operating profit will be announced on October 8 BofA expects KRW 10.7 trillion, and supported by strong sales and ASP increases in HBM4, DDR5 and even NAND, this figure could easily meet Wall Street's optimistic consensus estimate of about KRW 11 trillion.