Transcription
bummed because you missed out on the memory stock boom. Maybe the boom's just getting started and you're early. Maybe SanDisk is, wait for it, the next Nvidia.
But why is SanDisk up 1,500% when they're not even the largest memory maker? Who is the largest memory maker? What's all this memory used for anyway? We'll answer all these questions and more, but let's start with the most important question. Why didn't anyone see this coming?
Well, back in June of 2024, we published this piece on 37 stocks benefiting from AI data centers. And in that piece, we utilized research from Spear, some excellent commentary they had around the AI data center opportunity. You can see that all spelled out here, but we asked the question, are there any blue ocean opportunities in any of these smaller areas? And we pointed to HBM as a potential play.
HBM stands for high bandwidth memory and we highlighted three players that produce most the high bandwidth memory that Nvidia's powerful AI chips demand. Well, since then these stocks have performed quite well. So you have SKH Highix returning 345% Micron several hundred% Samsung 130% and you compare these returns to the NASDAQ return of 33%. And so they handily trounced their benchmark.
But what about these other companies that have performed even better? So you have SanDisk returning 1,520% since June 2024. Western Digital at 373% and Seagate following not far behind.
And what is HBM anyway? So when you think about RAM or random access memory, it hails back to a much simpler time when you could take a motherboard like this and just start slapping memory chips onto it because this random access memory is used for your computer to perform various functions. It's a lot quicker than hard drives. So that's changing with new solidstate drives that are out.
But there are many types of memory out there and right now I just want you to focus on this one type, HBM. So, it's a new type of memory chip with lower power consumption and ultra wide communication lanes for AI to do all its magic. And this report by ID Techch Research talks about how there's a memory bottleneck for high performance computing, that's HPC and AI and HBM memory is essential for GPUs and accelerators and an overwhelming majority of these hardware providers are using it. And as a result, you can see here that they forecast the demand for HBM memory to increase by 15 times over the next decade.
But that's just a part of the memory story. What I found more interesting is what's happening as a result. So these AI servers require far more memory per system than your typical consumer device. So what's happening is manufacturers like Samsung Micron SKH they're moving away from producing other types of memory to focus on HBM. There's a lot better margins to be found there because there's high demand for that particular type of memory.
As a result that's restricted supplies of other memory types for consumer electronics and you're seeing that manifest itself across the marketplace today. And it comes in the form of higher prices, of course, and companies saying they're missing their estimates because they can't sell so many devices because they don't have the RAM they need.
Now, the Bulls are going to tell you this isn't a typical boom bust cycle that you often see in the memory space, but a structural shift driven by hyperscalers that will continue investing in data centers until the sun consumes the Earth. Whilst the bears might say, well, this is just another cycle in memory, so don't get too excited about it.
Now, traditionally, memory has been considered a commodity product because it's standardized and fungeible. You can easily interchange memory regardless of who produces it. So, it's heavily influenced by supply and demand cycles. So, lately there's been a shortage of various memory types. I've listed a few here. You have DRAM, NAND flash memory, and of course, high bandwidth memory. We're going to touch on some of these other types in a bit.
But it comes down to Nvidia needs HBM, so drop what you're doing and produce HBM, so you can sell it at high prices for high margins. And that's exactly what Micron did. Here you can see the major suppliers, as I mentioned earlier, these three companies, and their relative market share. You see Micron's market share jumping there last year. And these three companies supply basically all the HBM.
Is it too late to invest in any of these names? And if not, then which names ought you to invest in?
Now, in that presentation almost several years ago, we looked at Micron's quarterly revenues, which you see depicted here. And we were trying to isolate the impact of HBM. And there were a few problems with that. First of all, they were having, as you can see here, revenues decline consistently over time across all their segments and the growth that they were showing was rather misleading because it was coming off such a low baseline.
Well, when you fast forward several years later, it seems like Micron's having their Nvidia moment. I had to check the numbers on this chart several times. Very remarkable revenue growth from this company. The red line being what their expectations are for next quarter. just through the roof. And also what's quite important is to look at profitability, right? So you see here that they actually saw a dramatic dip in profitability before that resumed its upward trend and their operating margins are now fairly healthy. Let's say back to normal. And we would of course expect this with the pricing power that they have.
And I pulled price to sales ratio here. I think this is from macro trend. So you can see that spike upwards. So when fundamentals don't move up enough then you'll see valuations increase as you're seeing here. Now we use something called simple valuation ratio. Macro trends would probably use trailing 12 months. We take last quarter and annualize it. That makes it more responsive and it also results in a little bit of a cheaper valuation for Micron around six. So to put this into perspective, our disruptive tech stock catalog where I think we calculate this for several hundred stocks, the average sits at around 7.5. You always look at valuation when you're considering buying a firm, not what the stock price has done. We invest in companies, not stocks.
And when you look at Nvidia for some sort of benchmark, I suppose their price to sales has never really done anything outrageous. I mean, you see it spiked upwards of 30 there at one point in time, but even with that dramatic share price appreciation, their fundamentals were equally as dramatic, and their price to sales has never really gotten too outrageous. This red square represents where the price to sales or simple valuation ratio sits for the companies that we're going to talk about today.
Some key questions really, how long is this demand for HBM going to persist? So, if IDC research is right, then we have a decade left. So that would make for a reasonable thesis, right? Will this offset declines in other areas? That's the concern that we had with Micron before and it seems like absolutely other areas are actually spiking because of HBM demand, which is great. But are there better ways to play this than just Micron?
Well, that brings us to the topic of South Korea. And I always love this picture. I took this in North Korea looking into South Korea. And that country is actually classified as an emerging market by MSEI because of the risk from North Korea. But the stock market has done tremendously well over the past year. It's actually been one of the hottest stock markets. And the reason for that can be seen here. This is remarkable. 47% of South Korean market cap can be found in two names here. Samsung and SKHEX, the two HBM manufacturers that we're going to talk about today.
So, what you could do is potentially just invest in South Korea and that's probably a conversation on its own. I'll probably be over there in late spring and we may look to do a piece on investing in South Korea. But right now, we just want to focus on these two companies.
So, let's start with Samsung Electronics. Here they've listed out their financials. I'm not going to go into what all these acronyms are, but this company sure does a whole lot of stuff. What we're interested in would be the DS acronym there or device solutions in particular the memory component that sits underneath there.
So Samsung's revenues and profits right now are being driven heavily by expansion in their HBM segment alongside of course conventional DRAM which is also seeing an uplift but we're not given any sort of granular breakdown to understand exact contributions. However, they are saying that this year they expect HBM sales to triple. So, if memory in 2025 was 31% of total revenues and 57% of total profits for Samsung electronics, what's that going to look like in 2026? Oh, probably a whole lot better. Basically, HBM is driving their entire business.
And you see here this recent article, it talks about how they could start mass production of their HBM4 chips next month for Nvidia. They say these new chips don't have performance issues seen in HBM3 and HBM3e chips. So past products that they were selling HBM products had some performance problems and now they've supposedly rectified that's probably where the three time increase is coming from right and when we look at simple valuation ratio for Samsung it's quite low sitting under three. This is the world's 15th most valuable company and there's a lot more happening than just memory. So I think if you were going to invest in Samsung electronics, you'd probably want to understand everything that you're getting yourself into.
That brings us to SKH Heinix, which is a rather interesting firm. So look at this strong revenue growth year-over-year, 47% over 100% growth in profits. And what I always like to look at, similar to what we saw with Micron earlier, is sequential growth, right? Quarter toquarter. Now, if a firm doesn't have a lot of cyclicality, that can be really useful in showing when they're breaking out in terms of their revenues. And you see here that SKHEX is seeing revenue growth sequentially grow by 34%. That's massive. That's not annual, that's quarterly. And also operating profit growth growing by 68%.
And here they've sort of broken that out. The last time we looked at this firm, we weren't able to examine where HBM was coming from. Well, now they've spelled that out a bit. You can see the arrow pointing to the segment under DRAM where HBM revenues are coming from. And overall, they're seeing demand across their entire business, all types of memory that they're producing, which is, as we said earlier, it's more than just the HBM story. It's memory as a whole really.
And when we look at valuation for SKH Heinix here, you can see now it's around 6.7. So not very lofty. When we calculate our own simple valuation ratio using last quarter, we get about 4.7. So really the HBM thesis seems not to be overvalued and you really should be early to the game still. That is if we believe that 2035 growth estimate and that demand is just starting to show now.
But there's potential overcapacity if the AI thesis cools. You have emerging alternatives like compute in memory, other technical solutions. You have geopolitical tensions, macroeconomic headwinds, all that. Now SKH seems quite compelling because of the breadth of their pureplay offering and their valuation. So you're getting multiple memory types there in addition to just HBM. With Samsung, you really need to consider what else you're getting yourself into. We didn't cover all the other various aspects of their business, right? Many of you have Samsung phones, although those come from Samsung electronics.
But what about the other names mentioned earlier? Western Digital, Seagate, and SanDisk. Well, I like this simple chart which shows you just how many different types of memory there are. And it starts to get real complicated in a hurry. got secondary memory which is referenced here in particular flash memory and solidstate drives which is sort of a hard drive made out of memory so it's super fast right that's the way forward well SanDisk centers on NAND flash which they produce for enterprise solidstate drives these are critical for AI workloads that need to retrieve lots of data very quickly they were spun out from Western Digital which is a company that also has a diversified portfolio of NAND and HDDs. And you have Seagate. They lead in HDDs, particularly with this new technology that enables 30 terbte plus drives.
So, a special thanks to premium subscriber Gordon Ross for letting me record this video at his lovely property here on Quadra Island in British Columbia. Truly a spectacular place to be. And I'm going to go ahead and leave you with a recent piece we did that's quite good. It looks at this thesis around how much AI is going to impact all those popular software as a service stocks that you're holding in your portfolio. Give that a watch next. Thanks so much for taking the time to watch this today.