DRAM ETF stock forms a bearish divergence as key risks remain

The Roundhill Memory ETF (DRAM) stock price dropped sharply this week as investors waited for the financial results of one of its biggest constituent companies. It also reacted to a new report about SK Hynix, the second-biggest company in South Korea. It was trading at $70 on Wednesday, a few points above this week’s low of $69.8.

DRAM ETF waits for Micron earnings

The Roundhill Memory ETF has been the fastest-growing ETF this year as its assets under management (AUM) soared to over $20 billion. This surge happened as investors piled into the biggest companies in the memory industry, which have soared to a record high.

At its peak earlier this year, the DRAM stock price has soared by 210% to a record high of $81. It then retreated sharply this week as investors booked profits and as most companies in the fund plunged. This includes popular names like SK Hynix and Samsung.

DRAM stock will be in the spotlight later today as Micron, its largest constituent company, releases its financial results. Analysts are highly optimistic about the company, with analysts expecting that its revenue jumped by 279% to over $35.25 billion, helped by the ongoing memory chip demand. 

The average estimate is that its annual revenue will soar to over $114 billion this year followed by $196 billion next year. This growth makes it one of the fastest-growing companies in the United States.

Micron’s earnings will have a major impact on the DRAM stock price. If the earnings and guidance are strong, its stock will jump substantially, leading to more gains in other companies in the fund. 

On the other hand, if the earnings are strong and its guidance is weak, chances are that it will drag the fund much lower.

The other key catalyst for the DRAM stock price will be a report from South Korea, where SK Hynix announced plans to raise up to 45.45 trillion won ($30 trillion) to boost its AI investments. It will do that by issuing 17.79 million shares to back this listing. 

The company plans to use the funds to add another factory in Yongin, purchase new chipmaker equipment, and build an advanced packaging fab in Cheongju. This will be the biggest ADR after Alibaba, which raised $21.8 billion.

DRAM stock faces concentration risk

The ongoing DRAM stock rally is happening as the company faces a major concentration risk. The main one is the fact that the fund is made up of a handful of companies. Data shows that Micron accounts for 27.7% of the fund, and is followed by SK Hynix and Samsung Electronics’ 27.52% and 16.23%. In total, these companies account for 72% of the fund.

Therefore, a single company can lead to major implications for the entire fund. For example, if Micron’s stock jumps, then it means that the fund will surge as well. If the stock drops, other companies in the fund will plunge.

The other risk is that all these companies are in the same industry, which is doing well this year. As such, there is a risk that the stocks will retreat sharply if the growth reverses. 

Additionally, two of the top companies in the fund - Samsung and SK Hynix - are from South Korea. This is a major risk as a major event in the country may hurt the entire fund.

DRAM stock chart | Source: TradingView

Technically, the stock has formed a bearish divergence pattern. As the chart above shows, the Relative Strength Index (RSI) has formed a descending channel. As such, there is a risk that it will reverse soon.

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