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The memory stock market is experiencing a surge, even in the face of disappointing earnings from Seagate Technology Holdings. While there are multiple factors influencing this trend, generative AI is the key driving force behind it.

Seagate and Western Digital Gain Momentum

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Despite the setback, Seagate (ticker: STX) and Western Digital (WDC), two prominent disk drive manufacturers, are seeing a significant increase in their stock prices. Likewise, Micron Technology (MU), a leading producer of DRAM and NAND memory chips, is also witnessing a surge in its stock value. Additionally, Lam Research (LRCX), a semiconductor-manufacturing equipment provider, has seen a notable gain of 9.3%.

Micron Benefits from Competitors' Positive Outlook

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Micron's upward momentum can largely be attributed to positive commentary regarding the memory market from its primary rivals, Samsung and SK Hynix. In their second-quarter reports, Samsung made several remarks that the market perceives as bullish for Micron.

Favorable Indicators for Memory-Chip Pricing

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Samsung announced that it intends to reduce planned capacity additions, particularly for NAND. This reduction has positive implications for the pricing of memory chips. Furthermore, while Samsung acknowledged weak overall demand for data center-related memory in the past quarter, there is an increasing demand for high-bandwidth DRAM used by cloud players in artificial intelligence applications. Samsung also expressed optimism that demand will gradually recover in the second half of 2023, with customers expected to complete their "inventory adjustments" by that time.

Micron Shares Soar on Growing Demand for AI-Related DRAM

Hynix, a prominent semiconductor manufacturer, recently announced that there has been a rapid increase in the demand for AI server memory. As a result, both their DRAM and NAND memory products witnessed a sales surge in the second quarter. Lam Research, another key player in the industry, also revised their 2023 outlook for wafer fab equipment spending, citing the growing demand for high-bandwidth memory (HBM), particularly in the AI sector. Teradyne echoed similar sentiments on their own call.

One company benefiting from these trends is Micron. Reduced NAND production coupled with the rising demand for AI-related DRAM has given a significant boost to Micron shares. Western Digital, known for producing NAND flash memory chips and disk-drives, is also capitalizing on these favorable market conditions.

However, Seagate's recent performance presents a more puzzling scenario. Their financial results for the June quarter, disclosed on Wednesday, were below both Street estimates and guidance. Similarly, the September quarter outlook also fell short of estimates. Nonetheless, Ted Mortonson, technology desk sector strategist at Baird, offers an explanation.

Mortonson explains that he has participated in multiple earnings calls this week where it became apparent that the demand for chip, memory, and interconnect hardware is starting to experience an upward inflection. This shift is largely driven by the construction of data centers to support generative AI.

Interestingly, Mortonson believes that AI will also necessitate high-density drives like those manufactured by Seagate. Despite Seagate witnessing a 43% decline in hard drive sales in the June quarter, Mortonson sees a promising future ahead. He confidently states, "the second derivative from here is straight up."

By Eric J. Savitz