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My friend MacroValue recently noted that the spot price for DDR5 memory chips has started declining, after an incredible rise from September 2025 onwards:
This decline begs the question: Is the DRAM capital cycle nearing its peak?
The "capital cycle" concept comes from Edward Chancellor who put together a compendium of writing from Marathon Asset Management in a book called Capital Account. The book argued that commodity industries tend to follow boom-bust cycles, with return on capital compressing over time as more and more capital enters the industry. Eventually, it leads to oversupply, bankruptcies, and reduced supply.
DRAM is a type of memory chip used for short-term storage of data. The demand for such chips has risen over the past year, as they're used in the graphics processors powering generative AI tools. The high demand for these services has now led to a shortage of DRAM chips, with prices quintupling in just a few months.
However, there are several reasons why the industry will exhibit typical capital cycle dynamics. As Harris Kupperman has pointed out, the scale of the generative capex spend is simply massive. Looking at his numbers, we're about to see US$400 billion in data center capex against revenues of US$15-20 billion per year. Once funding dries up, capex could well decline.
And we're now starting to see demand destruction. Counterpoint expects 2026 smartphone volumes to drop -2% due to current high DRAM prices. Many flagship phones will reduce their DRAM capacities to save money. Current DRAM prices may be unsustainable.
We should also see a supply response by the middle of 2026. SK Hynix's M15X fab is scheduled for completion in early 2026. Samsung Electronics' Pyeongtaek P4 Phase II and P5 fabs are also planned for completion in 2026.
Meanwhile, the big three memory chip makers, Micron, SK Hynix, and Samsung Electronics, now trade at elevated Price/Book valuations:
I will admit that in the short run, there is no sign of an imminent peak in profitability. The inventories of High Bandwidth Memory chips used in AI data centers remain ultra-low. The volume-weighted DXI Memory Index has yet to peak. And DRAM contract prices have yet to decline.
I think the key factor to watch will be capacity additions from SK Hyni and Samsung Electronics. They're slated for the second quarter of 2025. Eventually, the DRAM cycle will peak. It's only a question of when.
