Wang Chuan: How can one not feel anxious after the neighbor Old Wang made thirty times his investment in storage stocks? (Six) - The Trap of Homogeneous Products

Author: Wang Chuan

This article is a continuation of Wang Chuan: How can you not feel anxious after the neighbor Wang made thirty times profit investing in storage stocks (Part 5) - The Bullwhip Effect.

1/ Stocks of storage companies are something that can easily make an inexperienced youth reach a climax quickly. More than thirty years ago, the main medium for mobile storage in the computer industry was the 3.5-inch floppy disk with a capacity of 1.44 MB. At the end of 1994, a company called Iomega launched a portable hard drive that could store 100 MB, also known as a zip drive, priced at $199. The zip drive solved a major problem for consumers who needed to back up and transfer large amounts of files.

2/ Iomega's sales skyrocketed from $140 million in 1994 to $1.21 billion in 1996. Iomega's stock also surged from about $2 per share at the end of 1994 to an equivalent of $330 per share in May 1996 (accounting for stock splits), yielding a return of over 160 times in just a year and a half. I remember at that time, a netizen expressed sincere amazement on a tech stock forum, saying, "This is more wonderful than sex!"

3/ After May 1996, Iomega's stock continued to decline, and by the end of 1999, its price had dropped more than 85% from the peak in 1996. Ultimately, in 2008, EMC acquired Iomega for $210 million, a 97% drop compared to its peak market value of $7 billion in 1996. What does a 97% drop mean? It means that after an 85% drop, some speculators thought they could pick up bargains and then it dropped another 80%.

4/ The theories of the speculators who were bullish on Iomega back then mainly included two points: 1) Until 1996, potential competitors seemed poor and expensive. 2) There was indeed a possibility that the zip drive would become a standard configuration for PCs, just like floppy disk drives. If this could bring in hundreds of millions of users, with each zip drive generating a profit of several dollars, the future would be limitless. Iomega's stock became the first meme stock to gain massive retail investor enthusiasm in the internet era, with a flood of capital pouring in, reinforcing the trend and burying many short sellers.

5/ Iomega's fall trajectory was more complex than outsiders imagined. The second half of 1996 was just a simple price correction, and competitors were not even on the horizon. In 1997, revenue was $1.74 billion, and the growth rate had clearly slowed down. CD-Rs, as potential competitors, had already become cheaper than zip drives for high-end users. By 1998, the price of CD burners was close to that of zip drives, but a CD cost less than a dollar, much cheaper than a zip drive, leading to the complete collapse of Iomega's moat. In 1998, its revenue only decreased by 3% compared to 1997, but the gross margin fell from 31% to 25%, turning profits into losses; the story was over.

6/ Products in the storage industry, represented by Dynamic Random Access Memory (DRAM), are among the most homogenized products in the tech industry. Homogenization means there is no brand premium, and prices change rapidly with global supply fluctuations. Historically, DRAM chip prices have dropped more than 80% in the short term at least six times: 1985, 1998, 2001, 2009, 2012, 2023, with several instances of price drops between 30% to 50%. The price decline of storage stocks is even more brutal than that of chip prices, with declines of 95% or even bankruptcies being commonplace. Micron's stock price in May 2025 is equivalent to its stock price in June 2000, losing a full 25 years. The four major bankruptcies in the storage industry over the past thirty years are: 1) Mostek, 1986. 2) Qimonda, 2009. 3) Spansion, 2009. 4) Elpida, 2012. As for other small bankrupt companies, they are countless.

7/ The essence of the storage industry is elastic demand, facing heavy assets, long cycles, and rigid supply. When storage prices are too high, elastic demand will naturally retreat and find ways to circumvent it. However, rigid supply comes online after 18 months, and production must be maximized, selling at any price immediately, or else profits cannot be maximized. Once rigid supply slightly exceeds elastic demand, price drops occur immediately, sometimes very violently.

8/ The phenomenon of a surge in storage industry stocks starting in September 2025 can be seen in hindsight as fundamentally due to cloud service providers' demand for AI chips, consuming various types of memory, especially High Bandwidth Memory (HBM), which broke through a certain critical point. Cloud service providers were willing to accept significant price increases for memory to secure production capacity for 2026 and 2027. As long as one or two buyers are sufficiently crazy, other competitors are forced to follow. The panic of shortages quickly spreads to smaller buyers and the consumer electronics sector. Major storage manufacturers learned from previous price crashes and chose to let prices soar instead of rapidly increasing production capacity, taking advantage of the time while it was still on their side to make a hefty profit.

9/ Flash memory manufacturer Sandisk's production cost in Q1 2026 (non-fiscal year) was $1.288 billion, down from $1.313 billion in the same period last year, indicating that this year's production costs have decreased by about 2%, with little change in the volume of storage produced. However, Q1 2026 revenue was $5.95 billion, with a gross margin of 78.3%, while revenue in the same period last year was $1.695 billion, with a gross margin of only 22.5%. Therefore, the 251% increase in revenue mainly came from corresponding storage price increases, not from selling more goods.

10/ Why was there no increase in sales volume, yet prices rose more than twice? Because market demand suddenly surged, but supply was rigid, with only so much available in the short term, leading everyone to scramble for the limited supply and drive prices up. This means that there may be an counterintuitive phenomenon in the future: when rigid supply finally comes online and demand reaches a new balance, flash memory prices and gross margins will inevitably return to previous levels. At that time, although sales volume will increase, total sales revenue and net profit may actually decline. The more you sell, the less you earn.

11/ Similarly, Micron's operating costs from November 1, 2025, to the end of February 2026 were $6.1 billion, an increase of less than 20% compared to $5.09 billion in the same period last year, but sales revenue was $23.86 billion, nearly three times the $8.05 billion from a year ago. The gross margin was 74.4%, compared to only 36.8% a year earlier. Micron's product line includes High Bandwidth Memory (HBM), DRAM, and flash memory, with capacity constraints and price changes being somewhat more complex than Sandisk, but unable to escape the same underlying logic.

12/ For homogeneous products, high gross margins will inherently eliminate high margins, and high prices will also eliminate marginal demand. Several major storage companies, seeing gross margins above 70%, are no longer indifferent and have started investing hundreds of billions of dollars to increase production capacity starting in 2026, but the large new capacity is expected to come online only by the second half of 2027.

13/ Those who are bullish on storage stocks might say that storage companies have started signing long-term agreements with customers to lock in capacity prices, which can prevent the risk of price collapse, right? The truth is, the less stable the relationship, the more everyone loves to sign long-term agreements. The reason for signing long-term agreements is that everyone temporarily needs them to avoid the worst-case scenario, creating a false but very fragile sense of security for both parties. However, when there are substantial changes in circumstances, the strong in the new situation will generally find some excuse in the agreement to immediately turn against the other party. The so-called long-term agreements in the storage industry generally do not exceed five years. Once future storage capacity comes online, if spot prices fall below the long-term agreement prices, buyers can find various loopholes in the agreement to make storage companies immediately share the pain of price declines. Even if the contract is legally flawless, buyers can threaten to transfer more business to competitors who are better for them after the agreement ends, and at that point, storage companies will generally concede immediately for long-term interests. The long-term agreements signed between memory manufacturers and customers are roughly comparable to the execution effect of the non-aggression pact signed between the Soviet Union and Germany in 1939. When everyone feels the risk and rushes to use formal agreements to mitigate it, do not naively believe that the risk has been alleviated; this is precisely a signal that the risk is increasing.

14/ There is also an asymmetry here: when all players are making big money, it only takes one new player who does not care about short-term economic benefits and can endure long-term losses to change the supply-demand relationship; as long as a new technological innovation emerges, it can significantly reduce demand. You cannot predict in advance which specific factor will directly change the supply-demand balance; you only need to know that the risk of storage prices falling is now highly asymmetric compared to the possibility of continuing to soar. The risk factors here include but are not limited to: 1) Rising interest rates and inflation leading to economic recession. 2) Cloud service providers cutting back on capital investments in AI. 3) The speed of new storage capacity coming online exceeding expectations, especially from Chinese companies like CMXT and YMTC, which are best at massively increasing capacity at any cost. 4) New AI chip designs, model architectures, and software algorithms that can significantly reduce the demand for memory. In fact, it is precisely because of the soaring storage prices that all the smart people in the world are racking their brains to actively reduce the demand for storage at various levels, including chip design, model architecture, and software algorithms.

15/ The storage industry, like other severely homogenized industries, has a fatal trap: at the peak of the cycle, product profits are extremely high, but company price-to-earnings ratios are often very low, even in single digits. It looks like a good value investment, but the risk is actually the greatest at this time. Because once commodity prices plummet, the original profits quickly shrink, or even turn into losses, then a low price-to-earnings ratio becomes meaningless. There are always many simple-minded investors who, lured by the low price-to-earnings ratio, invest all their savings into this huge wealth incinerator during the industry's downturn without thinking.

The neighbor Wang is still immersed in the dream of easily getting rich from storage stocks and being able to retire comfortably in the future. Do not disturb him. To know what happens next, stay tuned for the next installment.

(Continued)

All articles represent the author's personal views for reference only and do not constitute investment advice for the mentioned assets. Investment carries risks; proceed with caution.