Author: Wang Chuan

This article is a Wang Chuan: When Next Door Lao Wang Invested in Storage Stocks and Made Thirty Times Profit, How Can One Not Feel Anxious (Part 5) - Whiplash Effect continuation.

1/ Stocks of storage companies are something that can easily excite inexperienced youths. It is said that more than thirty years ago, the main medium for mobile storage in the computer industry was the 3.5-inch, 1.44 MB floppy disk. At the end of 1994, a company named Iomega launched mobile hard drives that could store 100 MB, also known as zip drives, priced at $199. The zip drives solved a major problem for consumers who needed to back up and transfer large amounts of files.

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

3/ After May 1996, Iomega's stock began to decline continuously, and by the end of 1999, the stock price had dropped more than 85% from its peak in 1996. 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% decline mean? It means that after a decline of 85%, some speculators thought they could buy at bargain prices, only to see another 80% drop.

4/ The theories of the speculators who were firmly bullish on Iomega back then mainly revolved around two points: first) Until 1996, potential competitors seemed to be both poor and expensive. Second) At that time, there was indeed a possibility that zip drives would become standard equipment for PCs, just like floppy disk drives. If this brought in hundreds of millions of users, with each zip drive generating a profit of a dozen dollars, the future would be limitless. Iomega's stock became the first meme stock in the internet era to gain a massive following among retail investors, leading to a flood of capital, creating a self-reinforcing trend that buried many short sellers.

5/ The downfall of Iomega was more complicated than what the outside world imagined. The latter half of 1996 was just a simple price correction, with competitors not yet visible. In 1997, revenue was $1.74 billion, and the growth rate had already slowed significantly. CD-Rs emerged as potential competitors, offering lower prices than zip drives for high-end users. By 1998, the price of CD burners was already close to that of zip drives, but a CD cost less than a dollar, significantly undercutting zip drives, leading to Iomega's competitive edge completely collapsing. Although its revenue in 1998 only decreased by 3% compared to 1997, its gross margin dropped from 31% to 25%, and it incurred losses; the story was already over.

6/ Storage industry products, represented by dynamic random-access memory (DRAM), are among the most homogenized products in the technology industry. Homogenization means no brand premium, and prices fluctuate rapidly with global supply changes. Historically, DRAM chip prices have dropped by over 80% within short periods at least six times: 1985, 1998, 2001, 2009, 2012, and 2023, along with many instances of price drops between 30% to 50%. Moreover, the prices of storage stocks have dropped even more severely than chip prices, with declines of 95% or even bankruptcies being commonplace. Micron's stock price in May 2025 will be equivalent to its stock price in June 2000, losing a full 25 years. Major bankruptcy cases in the storage industry over the past thirty years include: one, Mostek, in 1986. Two, Qimonda, in 2009. Three, Spansion, in 2009. Four, Elpida, in 2012. As for other small bankrupt companies, they are too numerous to count.

7/The essence of the storage industry is elastic demand in the face of heavy assets, long cycles, and rigid supply. When storage prices are too high, elastic demand naturally recedes and seeks ways to circumvent it. However, rigid supply will come online after 18 months, and capacity must be maximized regardless of the price to sell immediately; otherwise, it cannot maximize profits. Once there is even a slight oversupply from rigid supply against elastic demand, prices collapse immediately, sometimes very violently.

8/ The surge in storage industry stocks starting in September 2025 can be attributed to cloud service providers' demand for AI chips, which consumes various types of memory, especially high-bandwidth memory (HBM) breaking through a certain critical point. Cloud service providers, willing to accept significant price increases for memory to secure capacity for 2026 and 2027. As long as one or two buyers are sufficiently crazy, other competitors are forced to follow. The panic over shortages quickly spreads to smaller buyers and the consumer electronics sector. Major storage manufacturers learned lessons from previous price crashes and chose not to rapidly increase capacity, opting instead to allow prices to soar while time is still on their side to reap a substantial profit.

9/ The flash memory manufacturer Sandisk reported production costs of $1.288 billion in Q1 2026 (non-financial year), down from $1.313 billion in the same period last year, indicating a 2% decrease in production costs, with production volumes remaining relatively stable. However, revenue in Q1 2026 was $5.95 billion, with a gross margin of 78.3%, compared to $1.695 billion in revenue a year earlier with a gross margin of only 22.5%. Therefore, the 251% increase in revenue mainly came from corresponding storage price increases, rather than selling more products.

10/ Why wasn’t more product sold, but prices increased by over twice? Because market demand suddenly surged while supply remained rigid, resulting in a scramble for limited supply which drove prices up. This suggests a potentially counterintuitive phenomenon in the future: once rigid supply eventually comes online and rebalance reaches equilibrium with demand, flash memory prices and gross margins will inevitably return to previous levels, when sales volumes may increase, but total sales revenue and net profit will actually decline, resulting in making less money even when selling more.

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 a year earlier, while sales revenue soared to $23.86 billion, nearly three times the $8.05 billion from a year earlier. 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 fluctuations being somewhat more complex than Sandisk, yet unable to escape the same underlying logic.

12/For commoditized goods, high profits will inherently eradicate high margins, and high prices tend to diminish marginal demand. Several major storage companies, observing margins above 70%, are no longer indifferent, and starting in 2026, they plan to invest hundreds of billions of dollars to increase capacity, although a significant amount of new capacity isn’t expected to come online until the second half of 2027.

13/ Those bullish on storage stocks may argue that storage companies have started signing long-term agreements with customers to lock in capacity prices, which can mitigate the risk of price collapse, right? The truth is that the more unstable relationships are, the more likely people are to sign long-term agreements. The reason for signing long-term agreements is that everyone temporarily needs them to avoid the worst-case scenario, which creates a false but very fragile sense of security for both parties. However, once the situation undergoes substantial changes, the strong players in the new situation will generally find some excuse within the agreement to immediately turn against the other party. The so-called long-term agreements in the storage industry typically do not exceed five years, and once future storage capacity comes online, if spot prices drop below the prices set in long-term agreements, buyers can locate various loopholes in the agreements, forcing storage companies to immediately share the pain of falling prices. Even if contracts are legally impeccable, buyers can threaten to transfer more business to competitors who are better for them once the agreements expire; under such conditions, storage companies typically concede for long-term interests. Long-term agreements between memory manufacturers and customers are somewhat akin to the non-aggression pacts signed between the Soviet Union and Germany in 1939. When everyone senses the risk and rushes to use formal agreements to hedge against these risks, do not naively believe that the risks are mitigated; this is precisely a signal that the risks are becoming increasingly larger.

14/There is also an asymmetry involved: when all players are making big money, it only takes one player who does not care about short-term economic benefits and can endure long-term losses to enter the market and change the supply-demand dynamic; as soon as there is a new technological breakthrough, it can significantly lower demand.You cannot predict beforehand which specific factors will directly change the supply-demand balance; you only need to know that the risks of storage price declines compared to the possibilities of continued surges are now highly asymmetrical. This risk factor includes but is not limited to: one) rising interest rates and inflation leading to economic recession. Two) Cloud service providers cutting capital investments in AI. Three) The speed of new storage capacity coming online exceeding expectations, especially from Chinese companies known for ramping up production at any cost like CMXT and YMTC. Four) New AI chip designs, model architectures, and software algorithms can greatly reduce memory demands. In fact, it is precisely because of the surge in storage prices that all the intelligent minds around the world are racking their brains to actively reduce demand for storage at various levels including chip design, model architecture, and software algorithms.

15/ Like other heavily commoditized industries, the storage industry has a deadly trap: at the cyclical peaks, product profits are extremely high, but the company’s price-to-earnings ratios are often very low, sometimes even in single digits. This appears to be a good value investment, but the risks are actually the greatest at this point. Because once commodity prices plummet, the original profits quickly shrink or turn into losses, then low price-to-earnings ratios become meaningless. There will always be many simple-minded investors who, seduced by low price-to-earnings ratios, without thinking, willingly dump all their savings into this giant wealth incinerator during the industry downturn.

Next Door Lao Wang is still immersed in the dream of becoming rich easily through storage stocks and being able to withdraw completely in the future. Do not disturb him. To know what happens next, stay tuned for the next part.

(To be continued)

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