SEOUL • After a blistering year-and-a-half surge, a sudden drop in some memory prices, followed by Samsung Electronics' disappointing profit estimate, is causing jitters among investors who had bet the chip boom would last at least another year.
Amid news that the market has started losing some steam - prices of high-end flash memory chips, which are widely used in smartphones, fell nearly 5 per cent in the fourth quarter - some analysts now expect the industry's growth rate to drop by more than half this year to 30 per cent.
That led shares in Samsung to dip 7.5 per cent last week, while its home rival SK Hynix fell 6.2 per cent. But analysts say there is unlikely to be a sudden crash, and that 2018 should be a relatively stable year for chipmakers.
The US$122 billion (S$161 billion) memory chip industry has enjoyed an unprecedented boom since mid-2016, expanding by nearly 70 per cent last year alone, due to robust growth of smartphones and cloud services that require more powerful chips that can store more data.
Supply also has become more disciplined following years of consolidation that reduced the number of manufacturers to a handful from around 20 in the mid-1990s.
"Memory chips will likely see a gradual price decline in 2018 if demand remains strong and appetite from servers holds," said analyst Lee Jae Yun at Yuanta Securities Korea.
But growth of 30 per cent is a strong gain in an industry known for volatility, and the market is still on course for its longest boom after shrinking 6 per cent in 2016.
Last year's explosive growth gave chipmakers cash to reinvest and boost output, analysts said. The supply of Nand flash memory chips, in particular, will grow 43 per cent this year, up from last year's 34 per cent, causing prices to drop by about 10 per cent, brokerage Nomura says.
Nomura expects growth in output will be largely led by the likes of Western Digital, Toshiba and Micron Technology as they seek to catch up with top-ranked Samsung, which controls about 40 per cent of the flash memory chip market.
Smartphone vendors have been including more memory in their phones and charging more for them, allowing them to weather last year's price surge, analysts say.
Average Dram memory of new models launched last quarter increased by 38 per cent from the second quarter of 2016, while Nand content measured by gigabyte jumped 84 per cent, according to an analysis by BNP Paribas.
Such solid demand will keep the industry's margin healthy this year, and chipmakers' investment in more advanced technology will help them cut production costs and stay profitable even as prices ease, analysts say.
Macquarie estimates operating profit margin at Samsung's chip division jumped to 47 per cent last year from 26.5 per cent in 2016, and will rise further to 55.5 per cent this year.
While the Nand flash market may soften somewhat, the Dram memory chip market, which is about US$20 billion bigger than the Nand industry, is seen as much tighter. Prices are expected to gain nearly 9 per cent because of a severe supply shortage.
With Dram manufacturers rushing to ramp up production - they are likely to nearly quadruple capital spending for 2017 and 2018 combined to US$38 billion from 2016's US$10 billion - prices may decline as much as 18 per cent next year, according to Nomura.