 We explain why the memory market should start to rebound in 2Q22e, much earlier than the market expects …  … and why memory stocks deserve to be re-rated  Raise TPs and maintain Buys on Samsung and SK Hynix; prefer pure memory play SK Hynix on better DRAM prices Long live the super cycle. While the market expects 2022e to be at best flat, we forecast DRAM and NAND revenue will grow 16% and 21%, respectively. We think the current downturn in prices is a blip and the super cycle will last until at least 2023e, supported by work from home, distance learning, and data traffic generated by demand for PCs and servers. Also, investment in metaverse infrastructure, while still hard to quantify, is an upside catalyst. We believe the memory industry cycle has become less volatile thanks to consolidation and this has improved earnings visibility.

Four reasons for a quicker turnaround are (1) new-found capex discipline by DRAM makers and longer equipment lead times; (2) a reduction in effective DRAM capacity – 2% in 2022e and 5% in 2023e – due to the launch of DDR5, a faster, more power-efficient DRAM that will consume 15-20% more wafers than DDR4 in PC and servers; (3) pent-up PC and server demand, which we expect to be released as the component shortage eases; and (4) the metaverse creating new demand for augmented and virtual reality headsets as well as data centre infrastructure. As we believe concerns about oversupply and the memory price correction are priced in, we expect a rebound to start in 2Q22e – 1-2 quarters ahead of consensus.

Reasons for re-rating; raise TPs. (1) Rising DRAM margin due to higher prices; (2) a less volatile DRAM cycle; and (3) rising capex intensity and technical challenges that will likely limit supply growth, leading to milder price corrections. As we forecast a sharper DRAM and NAND price rebound, we prefer pure memory maker SK Hynix (Buy). We raise our TP to KRW185,000 from KRW140,000 based on our increased earnings forecasts and a higher reference PB multiple. We raise our TP for Samsung to KRW105,000 from KRW96,000 on stronger projected earnings and our forecast period rollover to full-year 2022e. Key downside risks for both companies include supply chain issues and weaker demand related to lingering effects of the pandemic.