AI demand sustains momentum in memory and high-end passive components

Overview

This is a BofA weekly report on the global technology sector, covering memory long-term agreements, AI server-driven MLCC/FC-BGA demand, DRAM/NAND spot-price rebounds, and the impact of Korea's ETF market on memory-stock volatility and valuations. The report combines AI infrastructure capital expenditure, hyperscaler revenue growth, the storage-price cycle, and Korea's equity-funding structure to form a broadly optimistic view of the memory and semiconductor supply chain.

Core views

The core views are: First, memory LTAs are more meaningful because downside in pricing is limited while upside remains substantial, with 60-70% of Samsung Electronics' memory sales already covered by LTAs. Second, SEMCO and LG Innotek are highly optimistic about AI server-related MLCC and FC-BGA demand, with 2Q operating profit more than doubling year over year and new capacity supported by Big Tech demand commitments. Third, the rebound in DRAM/NAND spot prices is continuing, while inventory replenishment, end-product launches, and a bottoming in Chinese smartphone shipments are improving near-term price elasticity. Fourth, Korean ETFs, particularly active ETFs, and pension-fund inflows may support re-rating of undervalued memory stocks, although leveraged ETFs will amplify short-term volatility.

Analysis framework

The report uses a weekly sector-tracking framework that combines management guidance from company earnings calls, spot and contract price data, cloud-provider capital expenditure and margin trends, Chinese smartphone shipment data, Korea's ETF market structure, and semiconductor supply-chain valuations and share-price performance to assess the direction of convergence across demand, pricing, earnings, and fund flows.

Methodology notes

• Sector cycleMemory price-cycle tracking

  Use DRAM/NAND spot prices, contract prices, and monthly changes to assess the tightness of supply and demand.

  The report focuses on comparing price trends for DDR4, DDR5, NAND wafers, and server DRAM, using new price highs and month-over-month increases to validate AI and inventory-replenishment demand.

• Orders and pricingLTA analysis

  Long-term agreements are used to secure demand and capacity, while limiting price declines and preserving room for price increases.

  Samsung Electronics' LTAs are primarily aimed at US Big Tech companies and use a rolling five-year structure; the report believes their terms are more favorable to suppliers' ASPs.

• Fund flowsETF market-structure analysis

  Use active ETFs, leveraged ETFs, and pension inflows to assess the potential for volatility and valuation re-rating in the Korean equity market.

  The report cites TIMEFOLIO's view that pension flows into active ETFs will focus more on fundamentals, while 2x leveraged ETFs will continue to create volatility.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• SEMCO (009150 KS)

  Beneficiary of the AI server MLCC and FC-BGA supply chain

  Strengths

  Management is optimistic about AI-related demand, LTA orders, prepayments, and contract price increases, with 2Q operating profit more than doubling year over year.

  Weaknesses

  Current MLCC/FC-BGA margins remain at mid-cycle levels, and future earnings depend on continued increases in ASPs and shipments.

  Comparison

  Like LG Innotek, it is part of Korea's high-end passive-component and substrate supply chain, with both supported by Big Tech AI server demand.

  Risks

  The pace of new-capacity deployment, fulfillment of customer demand commitments, a reversal in the pricing cycle, and volatility in the Korean market.

• LG Innotek (011070 KS)

  Beneficiary of AI server FC-BGA and related component demand

  Strengths

  AI server-related orders are strong, with prepayments supporting the construction of future new factories or capacity expansion.

  Weaknesses

  The new FC-BGA plant in Vietnam is expected to begin operations in the second half of 2027, creating a time lag before capacity contributes.

  Comparison

  Like SEMCO, it benefits from Big Tech commitments to use new capacity and demand growth from 2H26 through 2028.

  Risks

  Expansion execution, weaker-than-expected ASPs, a slowdown in AI capital expenditure, and customer concentration.

• DRAM/NAND supply chain

  The AI infrastructure and inventory-replenishment cycle is driving an upturn in prices

  Strengths

  DDR4, DDR5, and NAND prices are at or near record highs, while server DRAM supply is supported by supply being constrained by HBM and server demand.

  Weaknesses

  Some prices showed signs of slowing or consolidating in 2Q26 and July.

  Comparison

  DRAM has greater price elasticity, while NAND has stabilized after a sharp increase but remains substantially above its 2025 lows.

  Risks

  Weaker end demand, the completion of inventory replenishment, slower contract-price increases, and supply growth driven by capital expenditure.

• Korean memory stocks and Korean ETFs

  Fund flows and trading structures affect valuations and volatility

  Strengths

  Inflows into active ETFs and pension funds may select undervalued memory stocks based on fundamentals, supporting re-rating.

  Weaknesses

  2x leveraged ETFs and inverse/gamma effects will amplify short-term volatility.

  Comparison

  Compared with passive KOSPI benchmark products, active ETFs place greater emphasis on growth, valuation, and shareholder returns.

  Risks

  Regulatory changes, leveraged ETF trading shocks, concerns over earnings misses, and declining market risk appetite.

Key data

• Share of Samsung Electronics memory sales covered by LTAs60-70%The report states that LTA pricing limits downside to less than 5% QoQ, while upside could reach 10-20%+.
• 2026 capital expenditure by major US technology companies$730bnCapital expenditure by Amazon, Microsoft, Alphabet, Meta, and Oracle is expected to increase by approximately 100% year over year in 2026.
• 2027/28 capital expenditure expectations$1tn+ paThe report expects leading technology companies to maintain capital expenditure at elevated levels.
• Cloud revenue growth35-45% YoY in 2026-28The report says hyperscaler cloud revenue growth remains robust.
• China June smartphone shipments17.1mn unitsBelow the normal level of 25-30mn units, with the report viewing inventories as lean and shipments potentially at a bottom.
• 16Gb DDR5 spot price~$50The report says the price has reached a historical high.
• 8Gb DDR4 spot price~$42The report says the price reached a record high in July.
• 64GB DDR5/DDR4 server module pricesDDR5: US$1,480; DDR4: US$1,300Server DRAM contract prices are at historical highs.
• Korean ETF market AUM~W500tnTIMEFOLIO's view indicates that Korea's ETF market is sizable, with more than 1,000 listed funds.
• Korean retirement pension AUMUS$300bn+Funds are increasingly flowing into active ETFs.

Impact & implications

The report implies that investment in AI infrastructure remains the primary driver of demand for memory and high-end packaging/passive components. LTA and prepayment mechanisms improve supplier earnings visibility, while rising spot and contract prices continue to improve ASPs and margins. For Korean memory and supply-chain stocks, strong fundamentals and low valuations may attract active ETF and pension-fund inflows, although near-term share prices remain highly volatile due to earnings-expectation gaps and leveraged ETF trading.

Risks

• If AI infrastructure capital expenditure falls below expectations, demand for DRAM, NAND, MLCC, and FC-BGA could weaken.
• Memory prices are already at elevated levels; if inventory replenishment ends or the recovery in end demand fails to continue, spot and contract prices could decline.
• Although the report views the expansion of China's domestic storage capacity as having limited impact on the spot market, it could still increase supply pressure over the medium to long term.
• Korean memory stocks are affected by 2x leveraged ETFs, earnings-expectation gaps, and market sentiment, potentially resulting in substantial short-term volatility.
• The construction of new capacity by SEMCO and LG Innotek, the start-up of the Vietnam FC-BGA plant, and fulfillment of customer prepayment commitments involve execution risks.

What to watch

• Whether DRAM/NAND spot prices continue to rise in August.
• Subsequent TrendForce updates on DRAM and NAND contract prices.
• Big Tech guidance for AI capital expenditure and cloud-business margins in 2026-2028.
• Whether Chinese smartphone shipments recover from the June low.
• Changes in AI server MLCC/FC-BGA orders, prepayments, and ASPs at SEMCO and LG Innotek.
• Inflows into Korean active ETFs and pension funds, and the impact of leveraged ETF regulation on market volatility.