If memory serves

Key takeaways

• Demand for memory chips has surged due to growth in data centre investment.
• This has coincided with a period of limited capacity addition from memory producers, leading to a severe supply deficit and surging memory chip prices.
• The profitability and share prices of Korean memory producers SK Hynix and Samsung Electronics have increased multi-fold, dominating returns in Asia.
• SK Hynix and Samsung Electronics now constitute 15.4% of the MSCI Asia ex-Japan benchmark.
• The Waverton Asia Pacific Fund has benefitted from its investments in both companies as “Improvers” in our investment framework but we have recently been reducing our exposure.

Memory chips sit at the heart of modern computing. They are used for storing digital information. That can either be for short-term, immediate access memory (‘DRAM’ chips) or for long-term data storage (‘NAND’ chips). These are essential components in computing hardware such as smartphones, personal computers, industrial computers and datacentres.

But the Memory industry has a chequered history. It has been notoriously cyclical despite having consolidated into a 3-player oligopoly over a decade ago. It is a highly capital-intensive business, where a commoditised product (DRAM/NAND) is sold through short-term contracts of 1-3 months. Capacity additions take 12-18 months to come online, creating a lag between the pricing signal of the spot market and the supply response, leading to severe industry cyclicality.

In the Waverton Asia Pacific Fund we have investments in both Korean memory chip producers, SK Hynix and Samsung Electronics, as "Improvers"; held in anticipation of a capital cycle upswing for the industry. The upcycle has occurred and has been far more powerful than expected (below), dominating returns in the portfolio and the benchmark. So, what has happened, and where do we stand now?

Memory price upcycle

Source: Factset

Anatomy of the current “super-cycle”: Lingering trauma from the 2023 industry downturn fostered a period of capital discipline among Memory producers

Demand for memory chips surged during COVID. Memory producers responded in characteristic fashion by doubling capital expenditure, partly funded by rising leverage. As demand then normalised post-COVID, the memory industry was left in a state of severe over-supply. Prices of memory chips collapsed, and so did profitability, with both Micron and SK Hynix making losses in 2023. As demand for data centres memory chips (known High Bandwidth Memory, or “HBM”) then began to grow in 2024/25, memory producers were initially unwilling to invest. Instead, they just converted existing plants to produce that HBM.

Industrial PTSD was fostering a period of stable industry supply, despite evident rapid growth in demand. This supply-side backdrop formed the core of our ‘Improver’ capital cycle thesis for the industry.

Memory demand has subsequently been far stronger than anticipated

Memory bandwidth dramatically increases the performance of AI models. More memory means that AI models can store and quickly access more data, allowing for larger and faster models. Because of this, we have observed a trend where each generation of Nvidia chip uses dramatically more memory content per Nvidia GPU (chart below).

HBM memory content by NVidia GPU model

Source: CLSA

This combination of surging demand and stable capacity led to an extraordinary increase in memory prices. The sell-side consensus forecasts suggests that the Memory industry will generate revenue of $700bn in 2027, up from $140bn in 2024.  Memory producers are now achieving Operating Margins over 70% (vs a through-cycle average of 20%), and Returns on Equity over 60%.

Why we now see more reasons for caution

There will be an inevitable supply response to this level of profitability. Based on management commentary we estimate that industry capex in 2026 could be treble the amount spent in 2024 (chart below). In addition, China’s two memory producers, CXMT and YMTC, have rising ambitions as China localises its semi-conductor supply-chain. Although they remain small today, both are planning IPOs this year to raise capital for growth.

This combination of extreme capex growth, capital raising activity, and potential re-fragmentation of the industry with the new entrants in China, are clear capital cycle warning signs. It makes the industry profitability fragile, should future demand growth fail to materialise as expected.

Industry profitability and capex

Source: Factset

We are also cautious on the ability for customers to stomach further Memory price increases. Smartphone customers are already struggling, with global smartphone volumes falling -6% in 1Q26. Hyperscaler customers have shown a tolerance for higher prices so far. But estimates for Memory industry revenue imply that the hyperscalers will spend c.$350bn on memory chips next year - a substantial sum in the context of total annual hyperscaler capex of c.$800bn.

Positioning in the Waverton Asia Pacific Fund

In this context, we have been taking profits from our Memory exposure. But we have not exited our positions yet. The potential next leg of the thesis rests more on an upgrade to the quality of earnings, which could warrant a structural re-rating of the shares.

Firstly, memory producers argue that HBM (the memory chips used in data centres) are evolving into a less commoditised product, with higher levels of customisation:

“The custom HBM will gradually increase from HBM4E. So, the product will be developed in close collaboration with customers from the early stage of design of the customers' GPU or ASIC products, unlike in the existing standardized HBM. This will lead to much longer term and strategic transactions between customers and a small number of suppliers, contributing even more to business stability and profitability improvement on the part of the memory suppliers.” SK Hynix October 2025 earnings call

Memory producers are also using their current negotiating power to encourage customers to sign multi-year volume commitments, with prepayments for capacity reservation and pricing floors. That would be unprecedented for this industry. But if successful, these changes could help create more order visibility, dampen the industry’s notorious cyclicality, and lock in profitability closer to the current level.

Given the history of Memory, our default position here is scepticism. But we feel we have some time yet to observe how dynamics evolve. That is because it takes 12-18 months to build new Memory production fabs; and thus, we do not expect major supply additions to come online until 2027. Given the ongoing strength of demand, it is therefore likely that the supply deficit worsens in the near-term.

We can use this window to judge whether the industry is now structurally evolving towards higher profitability and lower cyclicality, or whether it will just be déjà vu all over again for the Memory sector.  

Glossary

DRAM (Dynamic Random Access Memory)
Short-term memory used in computing devices to enable fast access to data while systems are in operation. It does not retain information once power is removed.

NAND (Flash Memory)
A form of non-volatile memory used for long-term data storage in devices such as smartphones and computers. It retains information even when powered off.

HBM (High Bandwidth Memory)
A type of memory designed to handle large volumes of data with high speed and efficiency, commonly used in data centres and advanced computing applications.