Analysts are raising a flag on the semiconductor industry as pricing of memory technology is pressuring a number of stocks.
Micron Technology (MU) has been a particularly troubled stock amid the trend of memory price decreases, causing the stock to fall 5.4% as the market opened. The stock has fallen about 30% since May 30.
The pricing issues of DRAM in particular was a contributing factor in Goldman Sachs downgrading his firm's rating on the stock from a buy to neutral on Wednesday.
"Memory downturns usually last for several quarters and can see an acceleration in price declines, as customers delay procurement to wait for lower prices when possible, causing a snowballing effect," said Goldman Sachs vice president of investment research Mark Delaney wrote in a note this morning. "That can lead downturns to be worse than initially anticipated by investors."
The firm cut its price target for the Boise, Idaho-based chip company from $68 to $50 on the back of these concerns.
In outlining the problems with the pricing in the industry, he explained the issue lies in simple supply and demand.
"Our recent industry discussions have suggested that US hyperscale customers will likely moderate server DRAM procurement in the first half of 2019," he explained. "This is because they now have more inventory on hand, and as current projects wrap up, there is more of a focus on price instead of just getting supply at any cost."
He explained that this is a significant potential negative factor for the future of Micron and semiconductors more broadly as "DRAM has been the clear bright spot for the market."
As Micron's DRAM based business accounts for over three quarters of its gross profit, pressure on this segment in terms of both supply and demand is understandably a cause for concern.
Delaney's take on Micron in particular and his concern over pricing impact was shared by his colleague, managing director of semiconductor research and equity analyst Toshiya Hari.
"We would also highlight that we are making a concerted call with our global colleagues here as we downgrade Micron, SK Hynix (HXSCL) and Tokyo Electron (TOELY) from Buy to Neutral and remove Buy-rated Samsung Electronics (SSNLF) and SUMCO SUOPY from the Conviction List," he wrote this morning in a report that raised caution on the semiconductor capital equipment market.
Hari's analysis is backed up by a TrendForce report, which shows that the impact on DRAM could be more significant than previously expected as the market becomes increasingly oversupplied.
"DRAMeXchange, a division of TrendForce, previously estimated that the contract prices of PC DRAM products will drop by around 2% quarter over quarter in 4Q18 as the market gradually shifts into oversupply," the report states. "However, it is now possible that the price decline will become larger due the shortage of Intel (INTC) CPUs and lower demand for notebooks and PC DRAM in a row."
The Philadelphia Semiconductor Index has declined about 3.5% in just the past week, reflecting this pressure.