SK Hynix’s US$570 billion sell-off shows cracks in memory chip boom ahead of earnings

[HONG KONG] A US$570 billion rout in just a little over a month has flipped SK Hynix from one of the world’s hottest artificial intelligence trades to one of the biggest portfolio question marks.

Shares of the South Korean memory chipmaker have plunged 45 per cent from their all-time high in June on concerns about overcrowding and a surge in leverage-induced volatility.

Its loss in market value over that span rivals that of even SpaceX.

While SK Hynix is expected to report another quarter of record earnings on Wednesday (Jul 29) as the AI boom drives chip prices higher, investors are turning skittish.

The primary fear is that rising memory costs will force customers to reduce usage and turn to cheaper alternatives.

“The debate now is whether memory is taking too much of the pie,” said Andy Wong, head of multi‑asset at Pictet Asset Management HK, whose fund has reduced its position in SK Hynix in recent weeks.

The market wants to see if “anything can shift the perception that SK Hynix is squeezing too much margin out of the supply chain”.

The Korean company’s shares have greater implications for global investors since the listing of its American depositary receipts, which have now dropped below their Jul 9 offering price.

The proliferation of leveraged exchange-traded funds tied to the stock has also grabbed attention due to the unprecedented volatility they have unleashed. 

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The stock is still on track for another year of triple-digit gains, buoyed by the firm’s early lead in high-bandwidth memory (HBM) for AI.

July’s pullback tracks broader caution over the tech hardware sector as doubts multiply over the durability of hyperscaler outlays.

Crucial results are due this week from top tech firms including Meta Platforms, whose plan to sell excess AI computing power stoked concerns over demand earlier in July.

Apple has already flagged cost pressures and is reported to be lobbying for approval to buy memory components from Chinese competitors including CXMT.

Investors also await full results for the June quarter from larger rival Samsung Electronics.

The world’s biggest maker of conventional memory chips is catching up to SK Hynix in HBM, said Kim Minji, a portfolio manager at Must Asset Management in Seoul.

For SK Hynix shares, “earnings results themselves won’t provide much catalyst”, said Kim, adding that whether the company boosts shareholder returns including buybacks is a key focus for investors.

“What’s more important is the earnings results from the big hyperscalers, whether they will continue to increase their capex and how much demand they see,” she said.

The stock’s big sell-off has enhanced its traditional cheapness due to memory cyclicality.

SK Hynix shares now trade at less than four times forward earnings estimates, almost halved compared with a month ago and below peer Micron Technology’s 6.2 times multiple.

SK Hynix is a “compelling buy” given attractive valuations and ongoing deleveraging among Korean retail investors, Shawn Oh, head of Korea cash equities at NH Investment & Securities, wrote in a note.

At the same time, “we are seeing people de-grossing their positions, if not already lightly positioned, ahead of the US tech earnings season”.

The current round of results has seen a number of companies suffer big stock drops even after stellar numbers.

Samsung’s shares dropped more than 6 per cent after its preliminary profit report on Jul 7, weighing on the broader Asian tech sector.

Analysts expect SK Hynix to report June-quarter sales more than tripled compared with a year ago to around US$57 billion, with a six times increase in operating profit.

“SK Hynix’s earnings may also become a global sentiment test for AI hardware,” said James Ooi, a market strategist at Tiger Brokers.

“Expectations are largely priced to perfection, so even a modest miss could prompt a sharp reaction.” BLOOMBERG