Memory Chips Emerge as Tech’s Safe Haven: Nomura Sees 2-3x P/E

Memory Chips Emerge as Tech’s Safe Haven: Nomura Sees 2-3x P/E

TREE NEWS reports: As the AI arms race among tech giants intensifies, free cash flow at the largest U.S. technology companies is deteriorating rapidly, while memory chip manufacturers are quietly accumulating cash. Nomura Securities argues that the market is fundamentally mispricing the memory sector, offering investors a rare safe haven amid broader tech volatility.

Third-quarter earnings from the five largest tech companies show no letup in AI investment appetite, but their financial strength is diverging. Meta recorded negative free cash flow of -$2.1 billion, its first since going public. Alphabet posted -$9.1 billion, its second consecutive negative quarter. Amazon’s trailing 12-month free cash flow gap widened to -$42.4 billion. Meanwhile, Nomura estimates that Korean memory duo Samsung Electronics and SK Hynix trade at just 2-3x 2027 expected earnings—an 85-90% discount to tech giants.

AI Investment Persists, But Financial Endurance Diverges

Enterprise AI investment has become a survival imperative, with companies tapping operating cash flow, debt, and equity. In Q3, only Microsoft maintained positive free cash flow at +$18.6 billion. Alphabet announced an $80 billion equity raise in June and suspended buybacks; Meta issued non-voting Class C shares and halted repurchases; Amazon’s long-term debt rose to about $107.5 billion. Market reaction was telling: Microsoft shares were flat, while Meta, Alphabet, and Amazon fell 7%, 10-13%, and 5-7% respectively after earnings.

For 2027, none of the five companies provided specific capex figures, but all indicated further increases. Nomura cites SK Hynix data projecting global cloud capex growth of 60% in 2027, implying combined spending of about $1.2 trillion for the four hyperscalers—well above consensus of 30-35%. Under that scenario, Nomura estimates the four companies’ combined free cash flow would turn negative to -$144 billion, requiring debt and equity financing, concentrating capital among those with strongest financing capacity.

Cloud Profitability Improves, But AI Cannibalizes Existing Businesses

In Q3, Azure, Google Cloud, and AWS combined revenue grew 56% year-over-year to $109.9 billion, with backlog at $1.82 trillion. AWS and Google Cloud operating margins reached 38.7% and 36.2%. Nomura calculates cloud data center IRR at 6-15% under base assumptions, rising to 13-31% at current spot rental prices. However, AI cannibalization is emerging: Google search revenue growth slowed to 12% in Q3 from 17% in Q2, despite query growth hitting a five-year high, as Google’s own AI mode dilutes monetization per query. Nomura notes AI investment is now a defensive necessity, not just a growth tool.

Capex Misses Reflect Supply Bottlenecks, Not Waning Intent

Q3 capex at Microsoft, Alphabet, and Meta fell short of expectations. Microsoft spent $45.2 billion versus guidance above $50 billion due to third-party data center delivery delays and accounting changes for leases. Amazon explicitly cited chip (foundry) supply shortages. Nomura sees the lag between intent and execution widening as supply shortages intensify in 2027.

Intel’s Q4 revenue guidance of $15-16 billion missed expectations of ~$17 billion, sending shares down 21% after hours. Nomura notes PC market weakness is industry-wide: memory price increases and shortages drove a ~20% year-over-year decline in Q3 global PC shipments. Intel also faces company-specific challenges including Intel 3 process and substrate shortages, a Israel factory accident cutting server shipments by ~$300 million each in Q4 and the next quarter, and structural constraints on shifting PC capacity to servers. Meanwhile, AMD continues to gain share in servers and PCs, and the Arm camp (NVIDIA Grace/Vera, AWS Graviton, Google Axion) is eroding Intel’s server CPU market.

Cash Flow Polarization, Memory Valuation Severely Depressed

Nomura’s core thesis: tech giants and memory manufacturers are on opposite cash flow trajectories. Tech giants’ free cash flow theoretically follows a J-curve—heavy investment first, then strong operating cash flow. But negative free cash flow is just beginning, with gaps likely to widen over the next year or two. Conversely, memory makers are at the start of a massive shareholder return cycle. Nomura expects shareholder returns to multiply in coming years, with cash reserves still rising substantially afterward. Yet the market assigns memory stocks just 2-3x 2027 expected P/E, versus an average of 20.9x for the four tech giants (Microsoft 24.3x, Amazon 21.7-23.3x, Alphabet 18.5x, Meta 18.1x)—an 85-90% discount. Nomura argues this embeds an assumption of peak memory earnings, but given supply shortages through 2028 and rising long-term supply agreements, the market is overly pessimistic on earnings sustainability. Memory offers a rare safe haven in tech portfolios.

Key Takeaways for Investors

• Diverging cash flows: Tech giants face mounting free cash flow deficits, while memory makers accumulate cash—a reversal of the usual growth-vs-value dynamic.
• Deep value in memory: 2-3x 2027 P/E for Samsung and SK Hynix prices in a peak-earnings scenario that Nomura strongly disputes.
• Supply shortage persists: Memory supply constraints expected through 2028, with long-term agreements rising, supporting earnings durability.
• Shareholder returns ahead: Memory makers are poised to ramp up capital returns, with cash reserves still growing.
• Tech volatility hedge: As AI capex weighs on big tech free cash flow, memory offers defensive exposure within the sector.