David Tepper's Appaloosa Management is primarily composed of the portfolio manager's personal wealth after returning most of its outside capital to clients in recent years. That means the moves in its portfolio represent what Tepper thinks are the best opportunities for his returns, not what he needs to do to meet client expectations. That can make it one of the more valuable funds to follow for retail investors trying to learn what the best investors in the world are doing.
During the fourth quarter, Tepper made a big bet on Micron Technology (MU 2.52%), the artificial intelligence darling that's soared over the last few months. Tepper also established a new position in another memory chip play that could interest some investors. Here's what you need to know.
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Tepper's new memory chip investments
During the fourth quarter, Tepper added 1 million shares of Micron to the portfolio, making the stock one of his largest positions. He also bought call options representing another 250,000 shares of the semiconductor stock. The other AI memory chip investment Tepper made was 1.875 million shares of the iShares MSCI South Korea ETF (EWY 5.63%).
While this ETF tracks an index of more than 80 stocks based in the country, it's dominated by just two. Samsung Electronics and SK Hynix account for over 48% of the entire fund's value. Combined with Micron Technology, the three companies account for practically all of the memory chip production in the world.
Indeed, the performances of Samsung and SK Hynix have largely dominated the returns of the ETF. Year to date, the fund's price has moved up mostly in line with Micron's. Both are up about 50% on the back of strong earnings results and positive outlooks, fueled by the ongoing shortage in memory chips, leading to higher pricing.
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Key Data Points
Tepper's increased investment in the memory chipmakers indicates a belief that the current demand cycle could extend beyond the market's current expectations. That could lead to higher earnings for longer.
The iShares South Korea ETF presents an alternative way for investors to buy into the massive demand cycle for memory chips, but investors should be aware that a cyclical downturn awaits, and they shouldn't overpay.
Should you follow Tepper's move?
With both Micron and the iShares ETF climbing 50% already in 2026, investors aren't getting in at nearly the same price as Tepper did. Still, if the demand cycle for memory chips is poised to extend well past the next couple of years, it could be worth paying up for the stocks.
All three companies are investing to build out capacity and convert existing capacity to fulfill the demand for high-bandwidth memory (HBM). HBM chips are packaged with GPUs and other AI accelerators. Their main function is to reduce the bottleneck for data access in AI training and inference. As large language models grow larger and use cases expand, the need for large amounts of fast memory chips has led to a big spike in demand.
It takes a couple of years for new foundries to come online and start producing additional chips. As a result, the memory chip shortage can be expected to last well into 2027. Of course, memory chip purchasers are well aware of that, and some may be over-ordering or stockpiling chips at this point in an attempt to front-run competitors and avoid higher pricing over the next few quarters. That creates artificially high demand right now at the expense of lower demand in the future.
Combined with new supply coming online from all three in late 2027, we could see a significant shift in the supply/demand equilibrium by 2028 unless there's another reason for a spike in demand. That's inherently impossible to predict, which is why investors shouldn't be willing to pay high multiples of a memory chipmaker's earnings, as there's a lot of uncertainty about how durable those earnings are.
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Key Data Points
Micron shares trade for 12.6 times forward earnings estimates, which is a relatively high multiple for the stock mid-cycle. Shares trade for 9.6 times 2027 earnings estimates, suggesting investors currently expect the earnings cycle to extend well past the end of next year.
SK Hynix shares are notably less expensive. Its shares trade for 5.9 times earnings estimates for this year. But Samsung shares are priced at 9.8 times earnings expectations. Both still seem somewhat overpriced considering expectations for marked slowdowns in earnings growth next year, signaling the maturation of the demand cycle.
While the iShares Korea ETF presents an interesting way to invest in the memory chip market, it too looks overextended after the run-up in shares of SK Hynix and Samsung this year. As such, it's hard to recommend following Tepper right now, but it's worth at least keeping an eye on both Micron and the iShares ETF.
