The rise of artificial intelligence (AI) infrastructure continues to advance, and if the recent decision by Semiconductor manufacturing in Taiwan (NYSE: TSM) Significantly increasing your capital expenditure (capex) budget is one indication, we are still in the early stages. Perhaps no company is more at risk of overbuilding than TSMC, because if it builds a bunch of factories (chip manufacturing plants) that become underutilized in the future, it will crush its gross margins and lead to a bunch of unprofitable facilities. As such, its management team made this decision after careful consideration and research.
Meanwhile, one of the companies at the center of the AI infrastructure boom that will benefit from its own bottlenecks is Micron technology (NASDAQ:MU). While TSMC makes logic chips, Micron makes memory components, which need their own independent factories. The DRAM (dynamic random access memory) market is essentially an oligopoly, and Micron, Samsungand SK Hynix They generally make these chips themselves rather than going to a third-party contract manufacturer.
While graphics processing units (GPUs) are at the center of building AI infrastructure, for these chips to function optimally, they need a specialized form of DRAM called high-bandwidth memory (HBM). HBM allows GPUs to store data and then quickly retrieve and transmit it. In a world where computer processing speed is increasingly important, demand for HBM is skyrocketing. However, the manufacturing process of HBM is much more complex compared to that of regular DRAM and requires three to four times the wafer capacity. However, with much higher gross margins and strong demand, companies are dedicating much of their production to HBM.
This is creating a shortage not only of HBM but also of DRAM in general. As a result, prices for HBM and all DRAM memory are increasing rapidly as the market becomes scarce. Micron forecasts the HBM market will grow at a compound annual growth rate (CAGR) of 40% through 2028. Its current supply of HBM is already booked for this year and the company should continue to benefit from rising memory prices.
About 80% of Micron’s revenue is derived from the DRAM market, and the other 20% from NAND (flash memory). The NAND market is also tight. Demand for huge, high-performance solid-state drives (SSDs) using flash memory has been on the rise due to AI, while at the same time, companies have been reluctant to resume production after the market collapsed due to oversupply a few years ago.