When will the 'storage frenzy' peak? This is the most effective 'leading indicator'

Since January 2023, driven by the demand for AI computing, storage chip stocks have continued to surge, with the average stock price of the top three storage manufacturers rising by 699%. However, as stock prices continue to climb, the market's primary concern is no longer "how much higher can it go," but rather "what signals should we watch to determine the turning point." On March 16, UBS Global Research released a report titled "Global I/O Storage Semiconductors," reviewing the cyclical patterns of the storage industry over the past 20 years and reassessing current leading indicators. UBS pointed out that, driven by AI computing, the underlying logic of the storage industry has fundamentally changed, and traditional valuation and forecasting models may no longer be applicable. Operating profit has become a better leading indicator. The Industry's "Underlying Logic" Has Changed: AI Pushes Supply and Demand Towards a New Equilibrium UBS attributes the key to this round of market performance to "the AI computing era, where storage value is elevated." The report notes that behind the revaluation, two supply-side constraints are accumulating: HBM is occupying an increasing amount of DRAM wafer capacity, leading to a "severe DRAM shortage"; This tension will also be amplified by the "trade ratio": the die size of HBM DRAM relative to DDR continues to grow, resulting in a higher "consumption" of capacity per unit of HBM. On this basis, UBS presents a conclusion that is more sensitive to investors—an upward shift in the return rate center. The report states: "We believe ROE has been structurally reset," and expects Samsung/SK Hynix/Micron to have an average ROE of 36% from 2026 to 2030E, significantly higher than the past decade's 15%. This means that using old cycle templates to find the peak may fail more frequently. Traditional Indicators Fail: "Second Derivative" Is No Longer Reliable In the past, investors typically liked to use the "second derivative"—that is, the quarter with the fastest acceleration in storage contract prices (ASP) on a sequential or year-over-year basis—to predict stock price peaks. However, UBS's review shows that the reliability of this indicator is declining. In the past 20 years, in 10 instances of "stock price peaks," only 50% of the time did the stock price and DRAM ASP show peak changes in the same quarter or adjacent quarters. For example, in the fourth quarter of 2009 (the recovery period after the global financial crisis), the second quarter of 2013 (the cycle after industry consolidation), and the first quarter of 2017 (the traditional cycle), the peak changes in ASP occurred 3, 5, and 5 quarters earlier than the stock price peaks, respectively. UBS points out that while the actual ASP's synchronization with stock prices is slightly better (60% of the time peaking in the same quarter), overall, the "second derivative" has become difficult to serve as an accurate "exit peak" signal in the current complex market environment. Finding New Anchors: Operating Profit is a Better Leading Indicator Since traditional indicators have failed, what should investors look at? UBS's answer is: Operating Profit (OP). Operating profit not only reflects price changes but also integrates factors such as bit growth and cost reduction per bit. Therefore, it is closer to the "terminal value" of the industry's true prosperity. The report analysis shows that over the past 20 years, stock prices have peaked simultaneously or ahead of operating profit in 90% of cases. Especially before 2012, the peak timing of stock prices and operating profit was almost synchronous. After that, market expectations became stronger, and stock prices typically peaked one to two quarters ahead of operating profit (most often one quarter ahead). However, UBS also reminds investors that predicting when operating profit will peak is not easy. The reason lies in the structural changes in supply and demand brought about by AI, which may make profit rhythms harder to predict, especially when HBM continues to encroach on DRAM capacity, complicating the interrelationship between price, supply, and profit, and the "estimated timing" of profit peaks may also shift rapidly. Therefore, operating profit can serve as an important observation indicator, but it is by no means a "cure-all." AI Reshaping the Industry: Structural Reset of ROE, Bull Market Expected to Continue Until 2027 UBS emphasizes that the current storage cycle is fundamentally different from previous ones. The arrival of the AI computing era has led to a fundamental shift of value towards the storage sector. As HBM (High Bandwidth Memory) occupies an increasing share of DRAM wafer capacity, the DRAM shortage issue is becoming more severe. In addition, the chip size of HBM DRAM continues to increase, further exacerbating capacity tightness. Based on these factors, UBS believes that the net asset return (ROE) of the storage industry has undergone a structural reset. The report predicts that from 2026 to 2030, the average ROE of Samsung, SK Hynix, and Micron will reach 36%, far exceeding the 15% of the past decade. Therefore, the report remains optimistic about the future of storage stocks. The report expects that the operating profit of the storage industry will peak in the third quarter of 2027. Under unchanged conditions, this means that the bull market for storage stocks is expected to continue until the second quarter of 2027. UBS continues to prefer buying SK Hynix while maintaining a "buy" rating on Samsung, Micron (MU), and Nanya Technology. 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