Contrasting Forecasts
Morgan Stanley predicted that the stock prices of semiconductor companies would underperform the market for more than a year to come. On August 10, the stock prices of Samsung Electronics and SK Hynix took a tumble in the wake of the negative forecast.
The previous day, Morgan Stanley adjusted its forecast for the semiconductor sector from “in-line” to “cautious,” which is its most pessimistic forecast implying that stock prices are likely to underperform the market for the next 12 to 18 months.
Analyst Joseph Moore said that market overheating has been detected from an increase in inventory. He noted that semiconductor distributors’ inventory has hit a 10-year high, while the risk-reward ratio of semiconductor stocks is at a three-year low. On August 10, the stock prices of Samsung Electronics and SK Hynix fell 3.2% and 3.72% to close at 45,400 won and 75,100 won, respectively.
Earlier, on August 5, Morgan Stanley lowered its forecast for SK Hynix, saying that the DRAM market would slow down next year and the competition in the NAND flash market would become even more intense. This implies the semiconductor super cycle that has continued for years is coming to an end. The investment bank also pointed out that semiconductor companies’ stock prices are already too high. The PHLX Semiconductor Sector Index showed an increase of approximately 200% for the past five years. During the same period, the market return stood at 70%.
At present, global investment banks and South Korean securities companies have very different views about the future of the semiconductor sector. “Although the DRAM demand and the NAND flash price may fall next year, industry leaders such as Samsung Electronics and SK Hynix are likely to reduce their investment in DRAM facilities, focusing more on profitability than on their market shares,” said KB Securities analyst Kim Dong-won. “In addition, NAND flash shipments are likely to increase despite a drop in price in view of the item’s demand elasticity.”
In the meantime, market research firm IHSMarkit recently predicted that the average selling price of NAND flash chips would fall at an annual average of 23.4% whereas the entire market size would increase 7.2% a year on average from 2017 to 2022.
Another industry source said that the decline in NAND flash price would lead to a period when chip producers seek adequate profits rather than to fierce price competition, with the chip market continuing solid growth.
Another prediction is that the super cycle will have a longer-than-expected duration based on new market items such as server DRAMs. “In the DRAM market, the proportion of those for use in computers and smartphones is likely to be reduced to less than 50%, but the B2B demand related to server and graphic applications will continue to increase to account for half,”Hanwha Investment and Securities said. IHS is also forecasting that the server DRAM demand will maintain an annual growth of at least 40% until 2022.
As such, a sudden drop in the performance of semiconductor companies is unlikely for the time being. According to local securities companies, Samsung Electronics’ operating profit, which hit an all-time high of 53.6 trillion won last year, is estimated to increase to 65.1568 trillion won this year and 66.3 trillion won next year. That of SK Hynix is estimated to increase from 13.7 trillion won to a record high of 22.2326 trillion won from last year to this year.
Some in the market are claiming that the pessimistic forecast of certain foreign securities firms like Morgan Stanley is for profit-taking purposes. “The global memory industry grew explosively during the past couple of years and investors now have some burden,” one of them explained, adding, “A sell opinion at this time can be a chance for them to exit with profits and for the securities firms to collect transaction fees from more sell orders.”