2 Developments That Should Have Memory Chip Investors Concerned

Bank of America Merrill Lynch analyst Simon Dong-Je Woo issued a cautious note on the memory chip sector, noting that the industry seems to be investing more heavily in capital expenditures that threaten at least near-term performance metrics.

Specifically, Woo pointed to HYNIX SEMICONDUCTOR HXSCF and Micron Technology, Inc. MU, both of which announced high capex targets for 2016 and beyond. These moves cast in doubt the "previous guidance for disciplined capex, profit focus and dividend increase" – all of which now appear "much less realistic."

Woo said that capex spend today does not have an impact for six to 24 months, potentially leading to concerns around excess capacity in 2016 and 2017. Further, BofA said it is concerned "about management's overconfidence on new chip demand," particularly inside Micron and SK Hynix. That overconfidence comes despite uncertainties driven by China that create a "higher downside risk to chip demand."

BofA downgraded both firms, with Micron going to Neutral and SK Hynix moved to Underperform. Despite the pessimistic outlook, Woo reaffirmed a Buy rating on SAMSUNG ELECT LTD SSNLF, even though he slashed the price objective by 6 percent. In part, Samsung will benefit from the fact that chip supply for DRAM will reflect "an oligopolistic nature," given that competition is between itself, Hynix and Micron.

In addition to Hynix, Woo also reaffirmed an Underperform rating on SanDisk Corporation SNDK and Silicon Motion Technology Corp. SIMO.