Strong AI Era Demand Will Drive HBM And DDR5 Expansion

Key Takeaways

• Anticipating demand for high-performance AI memory and DRAM products, SK hynix expects revenue growth and improved net margins.
  
• Infrastructure investments and a new shareholder return policy are poised to enhance long-term growth, operational efficiency, and financial stability.
  
• Macroeconomic risks and increased competition may impact SK hynix's revenue and margins through pricing pressures, demand uncertainties, and infrastructure investment strains.

Catalysts

Engages in the manufacture, distribution, and sale of semiconductor products in Korea, China, rest of Asia, the United States, and Europe.

• SK hynix anticipates strong growth in AI memory product demand, especially for HBM, driven by data center investments and the AI era's onset. This shift towards high-performance products is expected to impact revenue positively.
  
• The transition from legacy DRAM products to high-performance DRAM offerings like DDR5 and LPDDR5 is expected to drive revenue growth and enhance net margins due to higher ASPs (average selling prices).
  
• The plan to increase HBM revenue by over 100% amid strong customer demand, including securing new ASIC customers, suggests a significant positive impact on earnings and profitability.
  
• SK hynix's infrastructure investments, such as the construction of M15X and Yong-in fabs, will support future growth and may improve long-term revenue streams and operational efficiencies.
  
• The new shareholder return policy aimed at strengthening financial stability and potentially enhancing corporate value is expected to improve net income and dividend payouts in the long term.

SK hynix Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SK hynix's revenue will grow by 17.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 29.9% today to 32.8% in 3 years time.
• Analysts expect earnings to reach ₩35450.8 billion (and earnings per share of ₩48989.36) by about March 2028, up from ₩19788.7 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₩45010.0 billion in earnings, and the most bearish expecting ₩27755.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.2x on those 2028 earnings, which is the same as it is today today. This future PE is lower than the current PE for the KR Semiconductor industry at 16.5x.
• Analysts expect the number of shares outstanding to grow by 0.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.95%, as per the Simply Wall St company report.

SK hynix Future Earnings Per Share Growth

Risks

• The macroeconomic and geopolitical risks, as well as inventory adjustments from PC and smartphone OEMs, present uncertainties in demand, potentially impacting SK hynix's future revenues.
  
• The continued decline in commodity memory prices due to weak demand and increased supply from Chinese manufacturers may result in decreased ASP and revenue growth for SK hynix.
  
• The potential for NAND price declines and slow demand recovery in general applications, other than enterprise SSDs, could lead to profitability pressures and possibly result in losses within the NAND segment, impacting overall margins.
  
• The construction and expansion of new fabs, like the M15X and Yong-in, could significantly increase infrastructure-related investment outlays, especially amidst current demand uncertainties, putting pressure on free cash flow and capital expenditures.
  
• Heightened competition from Chinese DRAM manufacturers entering the DDR5 market, despite their technology lag, could still result in pricing pressures and margin contractions in SK hynix's conventional DRAM business.

Valuation

• The analysts have a consensus price target of ₩276474.139 for SK hynix based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₩350000.0, and the most bearish reporting a price target of just ₩223500.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₩108068.6 billion, earnings will come to ₩35450.8 billion, and it would be trading on a PE ratio of 7.2x, assuming you use a discount rate of 10.0%.
• Given the current share price of ₩205500.0, the analyst price target of ₩276474.14 is 25.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.