Storage Stock Volatility and Homogeneous Product Traps

Author: Wang Chuan

This article is a continuation of Wang Chuan: How Can You Still Be Anxious After Your Neighbor Wang Invested in Storage Stocks and Made 30x? (Part 5) – The Bullwhip Effect.

1/ Storing company stocks is something that can quickly excite an inexperienced teenager. Back over thirty years ago, the primary 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 mobile hard drive capable of storing 100 MB, known as the zip drive, priced at $199. The zip drive solved a major problem for consumers who needed to back up and transfer large volumes of files.

2/ Amedica's sales surged from $140 million in 1994 to $1.21 billion in 1996. Its stock price rose from approximately $2 per share at the end of 1994 to the equivalent of $330 per share in May 1996 (adjusted for stock splits), delivering a return of more than 160 times in just one and a half years. At the time, a netizen famously posted on a tech stock forum: “This is even better than sex!”

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

4/ The main arguments made by speculative bulls who strongly backed Iomega back then were as follows: First, until 1996, potential competitors appeared to be weak and overpriced. Second, there was a real possibility that disk drives would become standard equipment on PCs, just like floppy disk drives. If this scenario materialized and brought in hundreds of millions of users, with each disk generating profits of several dollars, the potential would be enormous. Iomega’s stock became the first meme stock of the internet era to attract massive retail investor interest; a flood of capital poured in, reinforcing the trend and burying many short sellers.

5/ The decline of Iomega was also more complex than outsiders imagined. In the second half of 1996, the price drop was merely a simple correction, with competitors still invisible. In 1997, revenue reached $1.74 billion, but growth had clearly slowed; CD-Rs, as a potential competitor, were already cheaper than diskettes for premium users. By 1998, CD burner prices had approached those of diskette drives, yet a single CD cost less than a dollar—far cheaper than diskettes—causing Iomega’s moat to collapse entirely. Although revenue in 1998 declined by only 3% compared to 1997, gross margin dropped from 31% to 25%, turning profit into loss—the story was over.

6/ Storage products, exemplified by Dynamic Random-Access Memory (DRAM), are among the most commoditized in the tech industry. Commoditization means no brand premium, with prices rapidly fluctuating based on global supply. Historically, DRAM chip prices have dropped by more than 80% in the short term at least six times: in 1985, 1998, 2001, 2009, 2012, and 2023, with numerous other instances of price declines between 30% and 50%. Stock prices in the storage sector have suffered even more severely, with 95% declines or even bankruptcies being commonplace. Microchip prices for Micron in May 2025 were comparable to those in June 2000, erasing a full 25 years of gains. Over the past three decades, the storage industry has seen four major bankruptcies: first, Mostek in 1986; second, Qimonda in 2009; third, Spansion in 2009; and fourth, Elpida in 2012. Countless smaller companies have also gone bankrupt.

7/The essence of the storage industry is elastic demand facing capital-intensive, long-cycle, inelastic supply. When storage prices are too high, elastic demand naturally retreats and seeks ways to circumvent it. But inelastic supply comes online 18 months later, and capacity must be fully ramped up—units must be sold immediately regardless of price, or maximum profitability cannot be achieved. Once inelastic supply slightly exceeds elastic demand, prices drop immediately, sometimes sharply.

8/ Looking back, the entire storage industry stock surge starting in September 2025 was fundamentally driven by cloud providers’ demand for AI chips, which consumed vast amounts of memory—particularly high-bandwidth memory (HBM)—crossing a critical threshold. To secure capacity for 2026 and 2027, cloud providers were willing to accept significant price increases. Once one or two buyers acted aggressively, competitors were forced to follow suit. The fear of shortages rapidly spread to smaller buyers and the consumer electronics sector. Major memory manufacturers, having learned from previous price crashes, avoided rapidly increasing production; instead, they allowed prices to surge, taking full advantage of the favorable timing to maximize profits.

9/ Flash memory manufacturer SanDisk reported a production cost of $1.288 billion for Q1 2026 (non-fiscal year), compared to $1.313 billion in the same period last year—a roughly 2% decline in production costs, with storage output remaining largely unchanged. However, revenue for Q1 2026 reached $5.95 billion, with a gross margin of 78.3%, compared to $1.695 billion in revenue and a gross margin of just 22.5% in the same period last year. Thus, the 251% revenue increase was primarily driven by higher storage prices, not by increased sales volume.

10/ Why didn’t more units sell, yet the price more than doubled? Because demand surged suddenly, but supply is rigid—there’s only so much available in the short term—so everyone competed for the limited supply, driving prices up. This means a counterintuitive phenomenon may occur in the future: when the rigid supply finally increases and rebalances with demand, flash memory prices and gross margins will inevitably return to their previous levels. At that point, although sales volume increases, total revenue and net profit will actually decline—the more you sell, the less you earn.

11/ Similarly, Micron’s operating expenses for the quarter from November 1, 2025, to February 28, 2026, were $6.1 billion, an increase of less than 20% compared to $5.09 billion in the same period a year earlier. However, revenue reached $23.86 billion, nearly triple the $8.05 billion from the same period a year ago. The gross margin was 74.4%, up from 36.8% a year earlier. Micron’s product portfolio includes High Bandwidth Memory (HBM), DRAM, and flash memory; while its capacity constraints and pricing dynamics are more complex than those of SanDisk, it cannot escape the same underlying logic.

12/For homogeneous goods, high margins inherently eliminate themselves, and high prices also erode marginal demand. Several major storage providers, no longer indifferent to margins above 70%, are set to invest tens of billions of dollars to increase capacity starting in 2026; however, the full impact of this new capacity is not expected until the second half of 2027.

13/ Those who are bullish on storage stocks might say, “Aren’t storage companies all starting to sign long-term agreements with customers to lock in capacity prices? Doesn’t that protect against price crashes?” The truth is, the more unstable the relationship, the more people rely on long-term agreements. The reason for signing such agreements is that both sides temporarily need them to avoid the worst-case scenario, creating a false yet extremely fragile sense of security. But once the situation changes substantially, the stronger party in the new environment typically finds some loophole in the agreement and immediately reneges. In the storage industry, so-called long-term agreements rarely exceed five years. Once additional storage capacity comes online and spot prices fall below the contracted rates, buyers can exploit various ambiguities in the agreement to force storage providers to immediately share in the pain of falling prices. Even if the contract is legally airtight, buyers can threaten to shift more business to more favorable competitors after the agreement expires—prompting storage companies to concede quickly for the sake of long-term interests. Long-term agreements between memory manufacturers and their customers are roughly as reliable as the non-aggression pact signed between Germany and the Soviet Union in 1939.When everyone senses risk and rushes to formalize agreements to mitigate it, don’t naively assume the risk has been reduced—this is precisely a sign that risk is growing.

14/ There is also an asymmetry here: when all players are making large profits, just one new entrant who doesn’t care about short-term economic gains and can absorb long-term losses can shift the supply-demand balance; similarly, the emergence of a single new technological innovation can drastically reduce demand. You cannot predict in advance which specific factor will directly alter the supply-demand equilibrium—you only need to recognize that the risk of storage price declines now far outweighs the possibility of further price surges. Risk factors here include, but are not limited to: one) rising interest rates and inflation leading to an economic recession; two) cloud service providers cutting capital expenditures on AI; three) new storage capacity coming online faster than expected, particularly from Chinese companies like CMXT and YMTC, which excel at massively scaling production regardless of cost; four) new AI chip designs, model architectures, and software algorithms that significantly reduce memory demand. In fact, precisely because storage prices have surged, smart people worldwide are actively working across chip design, model architecture, and software algorithms to minimize storage requirements.

15/ The storage industry, like other highly commoditized industries, has another deadly trap: at the peak of the cycle, product profits are extremely high, but company P/E ratios are often very low—sometimes even in single digits. This may appear to be an attractive value investment, but in reality, this is when the risk is greatest. Once commodity prices plummet, the previous profits quickly shrink—or even turn into losses—rendering the low P/E ratio meaningless. Too many naive investors, lured by the low P/E ratio and without thinking critically, willingly invest their entire savings into this massive wealth incinerator during the industry’s downturn cycle.

Neighbor Wang is still lost in the dream of growing rich effortlessly by holding stocks and retiring comfortably in the future. Don’t disturb him. To find out what happens next, stay tuned for the next episode.

(To be continued)