Semiconductor Margins Will Suffer Amid Deglobalization And Regulation

Key Takeaways

• Intensifying trade barriers and environmental regulations are set to drive up SK hynix's costs and strain access to crucial export markets.
  
• Advances in quantum computing and new competitors threaten SK hynix's traditional memory business, leading to persistent pricing pressures and volatile profitability.
  
• Leadership in advanced memory technologies and strong customer relationships position SK hynix for sustained growth, stable earnings, and enhanced competitiveness amid rising AI-driven demand.

Catalysts

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

• Heightened global trade barriers and deglobalization-such as the risk of U.S. semiconductor tariffs and supply chain fragmentation-are poised to increase SK hynix's operating costs and disrupt access to key export markets, thereby threatening long-term revenue growth.
  
• The accelerating pace of environmental regulations worldwide will likely impose significant new costs on manufacturing energy use and production methods for SK hynix, leading to sustained pressure on operating margins and reduced profitability over time.
  
• The ongoing rise of quantum computing and alternative memory technologies poses a structural threat to traditional DRAM and NAND markets, risking secular declines in SK hynix's core revenue streams and triggering a long-term erosion of earnings power.
  
• Persistent dependence on the highly cyclical memory market exposes SK hynix to extreme swings in pricing and demand, making future net income and cash flow increasingly volatile as secular industry trends shift.
  
• A rapidly intensifying competitive landscape, driven by state-supported Chinese memory producers and rising market power of downstream device manufacturers, is undermining SK hynix's pricing leverage and margin structure, resulting in lower long-term returns on invested capital.

SK hynix Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on SK hynix compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming SK hynix's revenue will grow by 5.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 36.4% today to 23.9% in 3 years time.
• The bearish analysts expect earnings to reach ₩20180.5 billion (and earnings per share of ₩27770.43) by about July 2028, down from ₩25976.5 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 9.6x on those 2028 earnings, up from 7.1x today. This future PE is lower than the current PE for the KR Semiconductor industry at 14.8x.
• Analysts expect the number of shares outstanding to grow by 0.25% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.9%, as per the Simply Wall St company report.

SK hynix Future Earnings Per Share Growth

Risks

• The explosive, long-term growth in demand for high-bandwidth memory and AI-driven memory products driven by global AI infrastructure build-outs and next-generation AI model proliferation is likely to keep SK hynix's revenues and gross margins expanding, especially with the company's leadership in HBM3E, DDR5, and upcoming HBM4 products.
  
• Ongoing digital transformation, spread of AI PCs, increased smartphone memory needs, and accelerating enterprise SSD adoption for data centers will underpin high DRAM and NAND demand, supporting sustainable multi-year growth in sales and operating profit.
  
• SK hynix's continued technological innovation-such as rapid advancements in HBM, high-capacity DIMMs, and mass production of advanced process nodes-enhances product competitiveness and cost efficiency, boosting the company's operating margin even during revenue declines.
  
• Industry consolidation, rational supply discipline, and supplier production cuts have led to more stable pricing and positive profitability in both DRAM and NAND markets, reducing the risk of margin erosion and supporting more consistent earnings performance.
  
• Deep and recurring relationships with top hyperscale, AI, and server customers-along with robust sales contracts and forward-looking capacity investments-position SK hynix for stable, long-term revenue streams and reduced volatility in future cash flows.

Valuation

• The assumed bearish price target for SK hynix is ₩205155.86, which represents two standard deviations below the consensus price target of ₩310256.56. This valuation is based on what can be assumed as the expectations of SK hynix's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₩430000.0, and the most bearish reporting a price target of just ₩188633.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₩84437.2 billion, earnings will come to ₩20180.5 billion, and it would be trading on a PE ratio of 9.6x, assuming you use a discount rate of 10.9%.
• Given the current share price of ₩269000.0, the bearish analyst price target of ₩205155.86 is 31.1% lower.
• 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.