Memory stocks: Is the wall of worry justified?

Memory semiconductor stocks have experienced a significant decline in value, with UBS analysts asserting that fears regarding impending supply expansion and market competition may be overstated. This sentiment has led the sector to appear relatively attractive, despite a notable 19% drop from their September high to near July lows.

The bank maintains a positive outlook on the industry, projecting an average free cash flow yield of 29% for the period of 2027-2030, excluding Chinese memory company ChangXin Memory Technologies (CXMT). UBS has designated Samsung Electronics (KS:005930) as its top recommendation within the memory sector and has retained buy ratings for all stocks under its watch.

The analysts note that surging demand for traditional server memory and solid-state drives is helping to counterbalance uncertainties surrounding high-bandwidth memory (HBM), which is primarily utilized in AI accelerators. Orders for server DDR5 memory are expected to continue increasing into 2027, driven by the proliferation of AI inference systems. Additionally, demand for Nvidia's system-on-chip memory modules, referred to as SOCAMM, has also shown a marked uptick.

UBS predicts that HBM shipments will rise by 49% year-on-year in 2027, largely due to a shift in memory configurations as manufacturers adapt to meet divergent demands for various memory products. Concerns over Chinese rival CXMT's anticipated implementation of a more advanced DRAM manufacturing technology are considered premature, according to UBS analysts.

They believe its initial stages of development will likely involve research or sample production rather than a substantial surge in industry supply. However, the bank has cautioned that Samsung's potential for faster capacity expansion, which could add more than 150,000 wafer starts per month of DRAM capacity by 2028, may not have a significant impact on industry supply and demand before late 2028.

UBS suggests that the recent share-price correction could serve as a catalyst for memory manufacturers to boost shareholder returns, potentially further bolstering valuations.