The margins in semiconductors don’t seem sustainable

jackandjillonthehill · 2026-06-22T03:26:05+00:00

=== SUMMARY === - The post argues that operating margins for major semiconductor firms (MU, SK Hynix, NVDA, TSM) have surged well above historical averages and are forecast to rise further, creating unsustainable conditions. - Risks include AI model efficiency breakthroughs reducing compute demand, capacity expansions, Chinese competition, and a slowdown in hyperscaler capex — all of which could compress margins. - The author questions whether continued context-window expansion will sustain memory demand, implying a potential peak in incremental chip demand. **Quality assessment:** Well-reasoned fundamental analysis with specific data points and multiple risk factors — qualifies as a thoughtful DD post, not speculation or noise. === SENTIMENT === BEARISH === TRADE IDEAS === TICKER - DIRECTION | confidence: 0.70 | sentiment: -0.70 Speaker: u/jackandjillonthehill Thesis: 1. THE FACT: MU operating margins expanded to ~50%, forecast to 70%, vs historical 20-30%. 2. THE BRIDGE: Margin mean-reversion is a classic value-investing red flag; capacity additions and China competition threaten pricing power. 3. THE VERDICT: Short MU expecting margin compression as memory oversupply and diminishing returns on context windows reduce demand growth. 4. RISKS: AI demand continues to surprise to the upside; capex remains elevated; China fails to produce viable alternatives. Timeframe: medium-term Key Points: - Historical margins 20-30%, now 50%+ - New memory capacity coming online - China memory chip makers emerging - AI context window gains may slow TICKER - DIRECTION | confidence: 0.65 | sentiment: -0.65 Speaker: u/jackandjillonthehill Thesis: 1. THE FACT: NVDA operating margins steadied at high 60% vs historical high 20%. 2. THE BRIDGE: Efficiency breakthroughs in models could reduce compute intensity, while dozens of Chinese GPU startups erode monopoly pricing. 3. THE VERDICT: Short NVDA on expectation that margins revert toward historical levels as competition and model opti

AI Summary

Summary

The post argues that operating margins for major semiconductor firms (MU, SK Hynix, NVDA, TSM) have surged well above historical averages and are forecast to rise further, creating unsustainable conditions.
Risks include AI model efficiency breakthroughs reducing compute demand, capacity expansions, Chinese competition, and a slowdown in hyperscaler capex — all of which could compress margins.
The author questions whether continued context-window expansion will sustain memory demand, implying a potential peak in incremental chip demand.

Quality assessment: Well-reasoned fundamental analysis with specific data points and multiple risk factors — qualifies as a thoughtful DD post, not speculation or noise.

Score 29

Comments 48

Upvote % 82%

▶ Full Post Text

Micron operating profit margins have expanded to about 50%, and they are forecast to go to something like 70%.  The average over recent history has been in the 20-30% range.   
   
SK Hynix is already at a 60% operating margin and is also forecast to go towards 70%.   
   
Nvidia, which used to have a high 20% operating profit margin, has been coasting at a high 60% operating margin for some time now.   
   
TSMC has always had pretty margins, in the high 30% range, but is now in the mid 50% operating margin and forecast to go towards 60% operating margin.   
   
These margins all seem quite high by historical standards.   
   
One big risk is a big efficiency breakthroughs in the models. This might improve capabilities without expanding compute as much, getting more bang for the buck.   
   
Another is that there does seem to be more capacity coming, at least from the big memory chip companies.  TSMC is expanding capacity at a slower pace.   
   
A third is that China catches up in a meaningful way. There are dozens of GPU startups in China now and many memory chip makers as well. They don’t have to get as good as an SK Hynix at memory and certainly not as a good as Nvidia at GPUs to have an impact, as long as you can string enough of them together and and direct less intensive work towards it, it can have an impact on margins.   
   
Finally, any slow down in capex expansion from one of the big model makers might lead to a disproportionately large move in margins. 

From my read there has been this steady march higher of compute demand and more capabilities unlocked at every step.   
   
In particular, it seems like it’s continued expansion of the context window that has enabled a lot of the big gains in AI functionality recently. The further expansions in the context window will mean more and more memory required.   
   
But at some point do we get diminishing returns of expanding the context window? And at that point, what happens to the incremental demand for memory chips?

Summary

▶ Full Post Text

More from Reddit — r/ValueInvesting