SKHY, MU, Samsung's Memory Technology Lead Over China’s CXMT Unlikely To Narrow Soon, Says Futurum Analyst

• Bulk highlighted that CXMT has to incur a higher cost in manufacturing its chips when compared to rivals SK Hynix, Micron, and Samsung.
• He believes CXMT is unlikely to catch up with the three incumbents in the sector anytime soon due to constraints on fab expansion and limited access to ASML's tools.
• Bulk also said that Apple’s attempt at diversifying its memory supply beyond SK Hynix, Micron, and Samsung is “understandable.”

SK Hynix Inc. (SKHY), Micron Technology Inc. (MU), and Samsung Electronics (SSNLF) have an advantage of about two to three generations over Chinese memory manufacturer ChangXin Memory Technologies (CXMT), according to Futurum’s Head of Semiconductor & Infrastructure Equity Research, Rolf Bulk.

During an interview with CNBC, Bulk cited the performance edge that SK Hynix, Micron, and Samsung have over CXMT's chips.

SK Hynix’s American Depositary Receipts (ADR) were up more than 1% in Wednesday’s pre-market trade, while Micron shares were up nearly 2%. SKHY was among the top trending tickers on Stocktwits at the time of writing.

The Roundhill Memory ETF (DRAM), edged up by 0.1%, while the iShares Semiconductor ETF (SOXX) was up 0.01%.

Bulk Highlights CXMT’s Higher Chip Costs Over SKHY, MU

Bulk also highlighted that CXMT has to incur a higher cost in manufacturing its chips when compared to rivals SK Hynix, Micron, and Samsung.

“CXMT is still two to three generations behind SK Hynix, Samsung, and Micron when it comes to the performance of their chips. So for every chip they produce, they have to spend 20% to 30% more on a cost per bit basis,” he said.

Bulk also believes that CXMT may not catch up to SK Hynix, Samsung, and Micron anytime soon due to constraints in building out its fabrication facilities and procuring tools from companies like ASML Holding (ASML).

However, he said that the supply and demand imbalance is so severe that CXMT’s profitability and demand continue to remain good. “They will probably do revenues of $50 billion this year and gross margins of around 70% with chips lagging a few generations compared to the incumbents,” Bulk added.

AAPL’s Attempts At Diversification Beyond SKHY, MU, Samsung ‘Understandable’

Bulk also said that Apple Inc.’s (AAPL) attempt at diversifying its memory supply beyond SK Hynix, Micron, and Samsung is “understandable” as the iPhone maker tries to negotiate prices down amid the ongoing supply crunch.

He also said that Apple had previously tried to add Chinese memory manufacturer Yangtze Memory Technologies (YMTC) to its list of vendors for iPhones sold in China.

“However, it is a real security concern in Washington, and I think that the chances of Apple adopting CXMT and YMTC remain fairly low,” Bulk said.

Bulk Says SKHY, MU, Samsung Earnings Visibility Is ‘Improving Materially’

Bulk said that long-term agreements will provide better earnings visibility for memory chip makers going forward, as companies like Micron and now SK Hynix are focusing on these deals to lock in revenue and margins.

“We’re moving from a market that is almost entirely driven by cyclicality, to a market where around half of revenue is locked in through these long-term supply agreements at gross margins of 50% to 60%,” he added.

Bulk said that these deals create a very different investment setup for companies in this sector compared to the previous thesis of playing the boom-and-bust cycles in the memory industry. He added that the earnings visibility of companies in this sector is already “improving materially.”

The Futurum analyst also said that while memory chip makers may have approached “peak profitability,” he does not expect the current gross margins to nosedive.

“However, given the supply constraints that we continue to see and the very strong demand driven by AI, which is also sustainable in our perspective, we don’t expect margins to collapse from here,” he said.

Bulk believes that the gross margins of memory chip manufacturers could increase slightly from current levels through the end of this year, then stabilize around 70% to 75% before gradually declining over the next decade.

The S&P 500 ETF Trust (SPY) is up 16% over the past 12 months, while the Invesco QQQ Trust (QQQ) is up 19%. The iShares U.S. Technology ETF (IYW) is up 28% during this period.

Also See: FOMC Meet: Fed Is Largely Expected To Keep Rates Unchanged, But Economists Say The Risks Have Shifted

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