Storage Stocks Defy Rate Hikes as Market Sees Three More Rate Increases Coming
The recent rate hike by the Fed has led to a surge in storage stocks, despite expectations that high-beta stocks would fall after a rate increase.
On Wednesday, the Fed hiked rates by 25 basis points to 3.75%-4.00%, its first rate hike since July 2023. Apple agreed to buy DRAM at nearly $2 per GB and NAND at $0.33 per GB starting from Q1 next year, 30% to 40% more expensive than in Q3 this year.
Storage stocks Micron and SanDisk rose 9.6% and 11%, respectively, over two days following the rate hike. The macro rationale for the rebound was that oil prices fell about 3% on Thursday, with Brent returning to $103.65, and the 10-year US Treasury yield fell back to 4.96%. CICC compared this rate hike to Alan Greenspan's 'preventive rate hike' in 1997.
The problem is that the stock market's reading differs from the Fed's statement. The Fed stated that it will achieve price stability, and 16 out of 18 officials believe there will be at least one more hike this year. Goldman Sachs changed its stance twice within four days and now bets on another hike in October.
CICC calculated a ledger showing that futures prices have priced in three rate hikes over the next year, while the S&P has priced in negative 0.5 times, and the Nasdaq has priced in negative 1.1 times. This indicates that the stock market and bond market heard two different messages.
The reason storage isn't afraid of rate hikes is that all a rate hike can do is make money expensive and suppress demand; it cannot create capacity. Micron executive Sadana said this week that meaningful new supply won't start ramping up until 2028, and there is currently no sight of a supply-demand balance point.
The prices of storage stocks are the most honest indicator of their value. Micron's forward P/E for next year is only 5.8x, a valuation that isn't afraid of discount rates. The risk itself lies in the fact that rate hikes make AI financing more expensive, capital expenditure slows, and storage orders drop.