[TMGM Financial Breakfast] SK Hynix Profit Soars Nearly Sixfold, Yet Shares Fall: Record Earnings Still Can't Answer One Question — How Long Can the Boom Last?

SK Hynix has just released its financial results for the second quarter of fiscal year 2026. The numbers were nothing short of spectacular: revenue reached KRW 79.32 trillion, up 257% year-over-year and 51% quarter-over-quarter; operating profit surged to KRW 60.54 trillion, up 557% year-over-year and 61% quarter-over-quarter; net profit climbed to KRW 93.92 trillion, up 1,242% year-over-year. Operating margin reached 76%, while gross margin stood at 83%. First-half revenue also exceeded KRW 100 trillion for the first time in the company's history.

These figures set new quarterly records for SK Hynix. Compared with the same period last year, revenue increased from KRW 22.23 trillion to KRW 79.32 trillion; operating profit rose from KRW 9.21 trillion to KRW 60.54 trillion; and net profit jumped from KRW 6.996 trillion to KRW 93.92 trillion.

The primary driver behind these results was the continued expansion of AI infrastructure investment. The company stated that "DRAM and NAND flash memory prices continued their upward trend from the previous quarter, both recording significant increases." Strong sales growth in high-value products—including HBM, AI server DRAM, and enterprise SSDs (eSSDs)—was the core reason behind the record profitability.

However, market expectations had been even higher. Analysts had generally forecast operating profit of around KRW 64.2 trillion and revenue of approximately KRW 83.9 trillion. The actual figures missed expectations by roughly KRW 3.7 trillion and KRW 4.6 trillion, respectively. When expectations have already been pushed to extremely high levels, outperforming them becomes increasingly difficult. CNBC summarized it succinctly: "SK Hynix posts another record quarterly profit but misses analyst expectations." The market is no longer valuing SK Hynix based solely on current earnings.

Heavy Exposure to HBM Has Become a Double-Edged Sword

SK Hynix has a larger proportion of its business tied to high-end memory chips used in AI data centers than its competitors. This means that when prices of conventional memory chips rise sharply, the company benefits relatively less. The current surge in semiconductor industry profits has been largely driven by higher prices for standard memory chips, while SK Hynix's revenue mix is more heavily weighted toward premium products such as HBM, limiting the overall growth in its average selling prices (ASP).

This is a counterintuitive phenomenon: HBM is SK Hynix's greatest competitive advantage, yet during this cycle of rising conventional memory prices, its high HBM exposure has actually reduced the company's earnings leverage.

In addition, KRW 62.17 trillion of the reported KRW 93.92 trillion in net profit came from a one-time investment gain resulting from the sale of its stake in Kioxia. Excluding this non-recurring gain, net profit from its core business was approximately KRW 31.75 trillion. The market is well aware that one-off gains cannot serve as the basis for valuation.

What Is the Market Really Worried About?

First, an 83% gross margin itself may signal that the industry is approaching the top of the cycle. The memory chip industry is notoriously cyclical. When profit margins reach historical extremes, investors naturally begin asking: Can margins go any higher? If not, the next phase may be a downturn. Speaking to CNBC, Baillie Gifford partner Tim Garratt commented that although SK Hynix has benefited from the recent AI tailwinds and margins have approached 90%, it remains "a cyclical bet that is vulnerable to industry downturns."

Second, competition from China's leading DRAM manufacturer is reshaping the supply landscape. On July 27, ChangXin Memory Technologies (CXMT) was listed on China's A-share market, with its market capitalization surpassing KRW 3 quadrillion. The company currently holds approximately 8% of the global DRAM market and continues to expand production aggressively. A Chinese competitor with an 8% global market share has officially entered the spotlight. According to Gelonghui, market concerns over rising competition in the semiconductor sector may have become so overwhelming that any positive highlights in the earnings report were largely ignored.

Third, doubts surrounding returns on AI capital expenditure continue to grow. Alphabet previously lost US$300 billion in market value in a single day after raising its capital expenditure guidance. Investors are becoming increasingly impatient with heavy AI spending. As an upstream supplier in the AI ecosystem, memory chip manufacturers are inevitably affected when investors begin questioning when these investments will generate meaningful returns.

SK Hynix is well aware of these concerns and responded with three clear messages in its earnings report:

Long-term agreements (LTAs) are being signed at an accelerating pace. The company has finalized long-term supply agreements with around 10 key customers and continues negotiations with other major clients. These agreements incorporate differentiated pricing mechanisms based on customer profiles and product categories, aiming to reduce the impact of extreme memory price cycles. The broader the coverage of these long-term agreements, the greater the visibility of the company's future revenue.

HBM4 production will expand in the second half of the year. Mass production of HBM4 began in the second quarter, with production set to increase further in the second half. HBM4E samples were delivered to customers during the first half of the year. The company stated that HBM4 delivers industry-leading energy efficiency and cost competitiveness while meeting customers' performance requirements.

Capital expenditure discipline and shareholder returns. SK Hynix expects full-year 2026 capital expenditure to remain at the upper end of the KRW 40 trillion range. The company is also evaluating additional shareholder return initiatives aimed at increasing both dividend size and sustainability. As of the end of the second quarter, cash and cash equivalents totaled KRW 88 trillion, with a net cash position of KRW 69.4 trillion, significantly strengthening its financial flexibility.

Where Could the Share Price Go Next?

In the author's view, the earnings season's "buy the rumor, sell the fact" pattern has not yet run its course. Samsung Electronics is scheduled to release its earnings on July 30, while Kioxia will report on July 31. If neither company can answer the question of "how long can the good times last," SK Hynix's share price may struggle to reverse its short-term weakness.

In the medium term, the outlook depends on two key variables.

The first is the sustainability of AI capital expenditure. If this week's earnings from Microsoft, Meta, Amazon, and Apple show continued increases in AI investment, the demand outlook for memory chips will remain intact. However, if signs of slowing investment emerge, the entire supply chain could come under greater pressure.

The second is the company's shareholder return policy. From both a valuation and price-to-earnings perspective, SK Hynix still appears attractive. In addition, the ongoing deleveraging among South Korean retail investors has further improved the stock's appeal. However, whether the company enhances shareholder returns through measures such as share buybacks will be a key catalyst for future share price performance.

Over the longer term, the stock's trajectory will depend on the pace of HBM4 capacity expansion and the intensity of competition from China's leading DRAM manufacturers.