What happened

Shares of KLA-Tencor Corp. (NASDAQ:KLAC) fell on Thursday after the company warned that its second-half results would be weaker than expected. The stock was down about 9.9% at 2:40 p.m. EDT.

So what

KLA-Tencor spooked investors with its presentation at the Citi 2018 Global Technology Conference in New York on Thursday. CFO Bren Higgins warned that September memory chip shipments were "still in a drought," and predicted that a recovery could be weaker than expected.

A man with his head on a table with a slumping chart in the background.

Image source: Getty Images.

KLA-Tencor sells the equipment used to manufacture memory chips. The market for memory chips, particularly DRAM, has been booming thanks to demand outstripping supply. Micron Technology, a major manufacturer of DRAM and NAND chips, has been enjoying record revenue and profits in recent quarters.

That bonanza may be starting to come to an end. "We thought that December quarter would snap back pretty strongly, when we look at it today ... feels like it will be up a little less than what we thought," said Higgins about the memory chip market.

The average selling price for NAND chips has declined by almost 50% since peaking in 2017, according to Reuters. "NAND pricing did decline in the third quarter," said Micron CFO David Zinsner, speaking at the same conference. DRAM prices are still strong, but some analysts are now predicting a reversal sometime next year.

Falling prices could lead to chip manufacturers cutting back on equipment purchases. KLA-Tencor now expects its second-half shipments to be flat to down by a single-digit percentage, far worse than its previous outlook calling for mid-single-digit growth.

Now what

The memory chip industry is cyclical. Periods of strong demand, low supply, and high prices lead to increased supply, which can eventually surpass demand and lead to tumbling prices. That, in turn, leads to slower supply growth, which sets up the cycle to begin anew. This has happened before, and it will happen again.

The portion of KLA-Tencor's business that serves memory manufacturers ebbs and flows along with this cycle. If the boom in the memory market is truly close to an end, the impressive revenue and earnings growth KLA-Tencor has managed over the past couple of years will likely end as well.

Timothy Green has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.