The artificial intelligence (AI) infrastructure boom continues to march forward, and if the recent decision by Taiwan Semiconductor Manufacturing (TSM +2.15%) to significantly increase its capital expenditure (capex) budget is any indication, we're still in the early innings. Perhaps no company is at more risk of overbuilding than TSMC, because if it builds a bunch of fabs (chip manufacturing plants) that become underutilized down the road, it's going to crush its gross margins and lead to a bunch of unprofitable facilities. As such, its management team made this decision after careful consideration and research.
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More AI chips means the need for more high-bandwidth memory
Meanwhile, one of the companies at the center of the AI infrastructure boom set to benefit from its own bottlenecks is Micron Technology (MU +0.67%). While TSMC manufactures logic chips, Micron makes memory components, which need their own separate fabs. The DRAM (dynamic random access memory) market is essentially an oligopoly, and Micron, Samsung, and SK Hynix generally manufacture these chips themselves instead of going to a third-party contract manufacturer.
While graphics processing units (GPUs) are at the center of the AI infrastructure buildout, for these chips to perform optimally, they need a specialized form of DRAM called high-bandwidth memory (HBM). HBM allows GPUs to store data and then quickly retrieve and transmit it. In a world where computing processing speed is becoming increasingly important, the demand for HBM is skyrocketing. However, the HBM manufacturing process is much more complex compared to regular DRAM and requires three to four times the wafer capacity. With much higher gross margins and strong demand, though, companies are dedicating much of their production to HBM.
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This is creating a shortage of not just HBM but also DRAM in general. As a result, prices for HBM and all DRAM memory are rising rapidly, given that the market is in short supply. Micron sees the HBM market growing at a 40% compound annual growth rate (CAGR) through 2028. Its current HBM supply is already booked out for this year, and the company should continue to benefit from increasing memory prices.
About 80% of Micron's revenue is derived from the DRAM market, with the other 20% from NAND (flash memory). The NAND market is also in short supply. Demand for enormous, high-performance solid-state drives (SSDs) using flash memory has been on the rise due to AI, while at the same time, companies have been reluctant to bring back production after the market crashed from oversupply a few years ago.
Overall, Micron remains in the catbird seat as demand for memory components outstrips supply and prices continue to rise. It is also increasing its capex to try to keep up with demand, but the market is likely to remain very tight over the next few years to its benefit.
