Graphics card specialists NVIDIA (NVDA +1.58%) and Advanced Micro Devices (AMD +1.22%) have started 2018 well. Both stocks have been boosted by terrific quarterly results, and it won't be surprising if they continue moving higher.
According to a post on pcgamer.com, Massdrop, a hardware marketplace, says its tech community head recently spoke to NVIDIA about the ongoing supply shortage in the graphics processing unit (GPU) space. NVIDIA reportedly told Massdrop that the shortage of memory chips needed to make GPUs could push up prices through the third quarter of the year. We can't verify what NVIDIA told Massdrop, but we can look into the topic.
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Memory chips are in short supply indeed
Prices of dynamic random access memory (DRAM) have shot through the roof over the past two years because of supply constraints caused by a rapid rise in demand. And manufacturers are not increasing capacity, which keeps pricing at strong levels. According to DRAMeXchange, which conducts research on DRAM and NAND, memory capacity will grow at a historic low of 19.6% this year as capacity investments from key manufacturers like Samsung, SK Hynix, and Micron take time.
For instance, DRAM wafer starts this year are expected to rise just 5% to 7% due to limited space for capacity expansion. And Samsung's plan to double its dividend this year means that the DRAM industry leader could put the brakes on capacity expansion, setting the stage for a price rise.
Moreover, any new capacity that comes onto the market will be lapped up by smartphone original equipment manufacturers (OEMs) and data centers. Massdrop reportedly said NVIDIA is blaming a rise in mobile DRAM demand for the memory shortage. Mobile DRAM demand did increase at a tremendous pace in the final quarter of 2017.
Rising server DRAM demand for use in data centers is yet another reason behind the increase in memory pricing. DRAM chip demand in 2018 is expected to increase over 30%, according to DRAMeXchange. So the supply constraints in the DRAM market will continue this year as manufacturers focus on meeting demand from smartphones and data centers.
This will hurt GPU supply due to the shortage of GDDR5 and high-bandwidth memory that's used to make graphics cards. And memory companies are now gearing up to produce GDDR6 memory that's expected to find its way into graphics cards later in 2018.
The transition to this memory type is another reason DRAM supply will remain low for the better part of the year, creating a slowdown in GPU manufacturing. In fact, even though GPU makers want to increase supply, they are unable to do so because of the lack of DRAM.
Impact on AMD and NVIDIA
NVIDIA and AMD have benefited big time from lower GPU supply of late as cryptocurrency miners have lapped up the available supply, keeping gaming enthusiasts at bay and prices high. BMO Capital Markets estimates that cryptocurrency mining contributed over $230 million to NVIDIA's fourth-quarter revenue, accounting for almost 8% of total revenue. By comparison, NVIDIA pulled in just $70 million in cryptocurrency-related sales during the third quarter. NVIDIA's full-year revenue increased 41% in 2017 and net income shot up 67% year over year thanks to strong pricing.
AMD reportedly generated between $75 million and $100 million in cryptocurrency-related sales during the third quarter, according to global investment bank Jefferies, supplying around 5% to 6% of the top line.
As GPUs could be in short supply this year and cryptocurrency-led demand might be on the upswing, both NVIDIA and AMD could see a strong jump in their margins and revenue.
