Written by: Rita

Storage chip stocks have collectively corrected by about 25% in the third quarter, with market concerns that content optimization signals a cycle peak. J.P. Morgan raised its global storage market research report on August 9, increasing the 2026 to 2028 TAM forecast by 4% to 8%, believing that the supply-demand gap will persist until the end of 2028. NVIDIA cut SOCAMM content from 1.5TB to 768GB, downgraded Rubin Ultra from 16-Hi HBM4E to 8-Hi/12-Hi, but J.P. Morgan pointed out that this is just a temporary measure by customers in response to supply shortages. AI CPU shipments are expected to grow at a compound annual growth rate of 155%, offsetting the downward adjustment of single-machine content, and the absolute value of the supply-demand gap is still expanding. J.P. Morgan believes that LTA and capital returns are the core catalysts for valuation re-evaluation, with Samsung and SK Hynix's cash yield expected to reach 16% to 20% in the next two years.

Content Optimization Does Not Indicate Cycle Peak, Absolute Value of Supply-Demand Gap Expanding

Storage chip stocks corrected about 25% in the third quarter, triggered by factors including short-term EPS expectations falling below optimistic scenarios, cloud vendors' AI capital expenditures lagging behind expectations, and mainstream memory content optimization. Concerns fueled by content optimization are the strongest. NVIDIA halved the SOCAMM memory for Vera CPU from the original 1.5TB to 768GB, adjusted Rubin Ultra from 16-Hi HBM4E to 8-Hi/12-Hi HBM4E, and Rubin GPU also saw the emergence of 192GB and 288GB SKU versions.

J.P. Morgan believes that these adjustments are passive choices by customers responding to shortages, not a collapse in demand. Looking at the absolute value of the supply-demand gap, the shortage is still expanding. Although the growth rate gap between supply and demand has narrowed from double digits to single digits, J.P. Morgan expects the degree of shortage to worsen further by 2027. DRAM ASP has risen for 20 consecutive quarters (starting from 1Q24), whereas in the previous twenty-year historical cycle, ASP rising cycles typically lasted only 6 to 7 quarters. Content optimization is simply a normal adjustment in AI's transition from "vertical scaling" to "horizontal scaling," not the beginning of a downturn cycle.

The LTA mechanism further reinforces J.P. Morgan's judgment. The LTA details disclosed in the second-quarter earnings report show that Samsung aims to include 60% to 70% of its capacity in long-term agreements, SK Hynix has signed contracts with about 10 customers, and Micron has completed 16 SCAs, with 14 of them large customers. Prepayments account for 20% to 25% of the total value of LTA, with pricing power clearly favoring storage manufacturers. LTA contracts are concentrated in server memory, with a premium of 30% to 40%, and J.P. Morgan believes that the increase in the proportion of LTA will provide structural support for pricing and profit margins in the medium to long term.

HBM Specification Downgrades Do Not Change Tight Supply-Demand Dynamics

HBM is the area most affected by content optimization. J.P. Morgan has lowered its HBM bit demand forecast for 2026 to 2028 by 4% to 19% to reflect conservative content assumptions. However, even after the adjustment, HBM will still maintain a double-digit percentage supply-demand gap from 2026 to 2028. Regarding HBM pricing, J.P. Morgan expects the mixed average price of HBM to increase by 42% year-on-year in 2027, lower than the market's doubling optimistic expectation, but different generations of products still have a premium gradient of 15% to 30%.

HBM4 and HBM4e will be the main products from 2026 to 2027. Samsung's progress on HBM4 and HBM4e is steady, and J.P. Morgan expects Samsung's order share for HBM to reach 37% to 38% from 2027 to 2028, consistent with Samsung's overall market share in DRAM. Samsung recently announced it has signed LTA contracts worth about 200 billion KRW (about 150 million USD) with Broadcom, with 90% to 95% allocated for ASIC-use HBM. Samsung has also secured HBM orders from both NVIDIA and ASIC customer groups.

Regarding competition from China, J.P. Morgan believes that CXMT's presence in the DRAM market will increase, with an expected 16% and 11% shares of global capacity and bit share respectively by 2028. However, there is still a 2 to 3 year technology gap between CXMT and traditional leading manufacturers, mainly affecting the low-end market such as DDR4. Recent attempts by CXMT to produce LPDDR6 and HBM are seen as positive for leading manufacturers. In terms of NAND, YMTC's bit/wave efficiency has been comparable to leading manufacturers, with limited technology gap, projecting that YMTC will hold about 16% of global supply by 2028, with the risk of NAND oversupply being higher than that of DRAM.

Capital Returns Are the Core Catalysts for Valuation Re-Evaluation

J.P. Morgan believes that LTA and shareholder returns are two key signals for judging the sustainability of the storage cycle. If LTA can truly smooth out cycle fluctuations and lock in high profit margins, leading manufacturers have reason to return more cash to shareholders.

Over the past twenty years, the shareholder return rates of storage manufacturers have been very low, with cash yields typically below 2%. However, J.P. Morgan expects a fundamental change in the next two years. Samsung's shareholder return plan for 2024 to 2026 requires returning 50% of cumulative free cash flow to shareholders, and J.P. Morgan estimates that Samsung's cash yield could reach 16% to 20% from 2026 to 2027. SK Hynix's shareholder return plan continues into the end of 2027, and with strong EBITDA in 2026 and additional cash from selling Kioxia shares, it may also initiate large-scale returns ahead of schedule. Kioxia has announced a share buyback plan of 800 billion yen.

Regarding EPS adjustments, J.P. Morgan estimates Samsung’s earnings per share in 2026 to be approximately 486,500 KRW and about 460,700 KRW in 2027. SK Hynix’s earnings per share for 2026 is estimated at about 361,300 KRW, up 13% from previous estimates, primarily reflecting the asset disposal gains in the second quarter. The super cycle for storage chips continues, and concerns fueled by content optimization are understandable, but J.P. Morgan believes this is just a passive adjustment by customers under supply constraints, and the fundamentals of tight supply and demand remain unchanged. HBM specification downgrades do not alter the direction of the supply-demand gap, LTA locks in pricing and profit margins, and the capital return plans of leading manufacturers will drive valuation re-evaluation. The end of the super cycle may be further away than the market expects.

Disclaimer

This article is a compilation and interpretation of third-party brokerage research reports (J.P. Morgan, August 9, 2026) by Chaoxiang Research, combined with publicly available market information. The ratings, target prices, earnings forecasts, and related judgments cited in this article are solely the opinions of the analysts from that brokerage and do not represent the views of Chaoxiang Research, nor do they constitute any investment advice.

The market carries risks, and decision-making should be independent. This article should not be used as the basis for buying or selling any securities.