Beware of the boom and bust cycle of memory stocks, investors warn

London – A boom in memory-related stocks has fueled huge gains in US and South Korean stock markets in recent years – but market watchers are warning investors to forget market cycles at their own peril.

The memory sector has been in a period of continuous growth since the launch of ChatGPT in December 2022, which created a huge demand for high bandwidth memory, or HBM.

Samsung again SK Hynix are among the largest producers of HBM chips, and their stock prices are up 114% and 186% year-to-date, respectively. It is based in the US Micron technology again SanDisk each increasing by 141% and 156% by 2026.

Central to the logic behind the capitalization of memory storage is the belief that the industry has shaken off its previous cycle, where demand for storage fluctuated wildly while supply remained fixed.

Executives have argued that AI has fueled the industry’s history of growth and development, and structural shortages mean prices could remain high for years.

William de Gale, portfolio manager at BlueBox Asset Management, told CNBC’s European Early Edition on Wednesday that the industry tends to have “good times and bad times”.

“In the long run it’s a scary industry,” he said.

“I suspect that’s still the case when people argue that the memory cycle is dead, and now it’s a long-term value-creating industry – just before it all goes terribly wrong.”

Although the memory chip The offer is very delayed at the moment, Google for Alphabet on March 24 revealed TurboQuant, a new method of compression, which it says can reduce the amount of memory needed to run large language models six times.

It’s designed to make AI models work better, the main goal of lead labs.

Such developments have the potential to reduce the need for AI memory chips, which have become an important part of training major LLMs at companies such as Google, OpenAI and Anthropic.

Deutsche Bank wrote in a note on Tuesday that investors should “continue to continuously prepare themselves for disruptions related to AI”, as evidenced by TurboQuant, which caused a significant drop in the share price of the largest memory providers upon its release.

Analysts added, however, that it “remains to be seen” whether TurboQuant’s approach will produce the desired structural change.

Jon Cunliffe, head of the investment office at wealth manager JM Finn, told CNBC that there is scope for production to expand meaningfully over the next three years, reducing supply constraints, “especially if demand for AI grows at a normal pace.”

“Today’s share prices assume that valuations remain high for a long time, companies remain strong by not overinvesting, and profit margins remain better than ever,” he added.

“We will also highlight that this sector has had a high level of congestion in recent weeks, which has made it vulnerable to being shaken.”

While predicting when memory supply may outstrip demand is an impossible task, investors should be careful when investing in an industry that has “historically moderate returns on capital that is expected to produce very high profits in the future”, according to Andrew Lapping, chief investment officer at Ranmore Fund Management.

“A tiger rarely changes its spots,” Lapping said of structural changes in the memory field.

Samsung and SK Hynix are responsible for sending South Korea’s Kospi to stratospheric heights between 2025 and 2026. Together, the stocks comprise more than 50% of the entire index.

Steve Brice, chief global investment officer at Standard Chartered, told CNBC’s Squawk Box Asia on May 13 that he believes the upside for Korean currencies is “not too far around the corner”.

“I was in Korea last week and we were instructing clients to take profits from parts of their portfolio and diversify into a globally diversified portfolio,” he said.

Still, some banks remain bullish on the two companies’ prospects, with Nomura estimating that SK Hynix stock will reach 4 million won and Samsung Electronics to reach 590,000 won in the next 12 months.

That would mean an improvement in Samsung’s share price of 20% and see SK Hynix double, based on current prices.

– CNBC’s Arjun Kharpal also contributed to this report.