A000660: Next Generation AI Memory Will Drive Sector Leadership

Key Takeaways

• Leadership in advanced memory and storage technologies for AI underpins premium pricing, margin expansion, and future-proofed revenue growth.
  
• Strategic capacity investments and strong partnerships with major AI players ensure supply resilience and revenue stability in rapidly evolving tech markets.
  
• Geopolitical risks, high investment needs, rising competition, soft NAND demand, and complex technology transitions threaten SK hynix's revenue stability, margins, and future profitability.

Catalysts

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

• Accelerating demand for high-performance memory solutions, particularly HBM and next-gen DRAM, as AI workloads and advanced reasoning models proliferate-this is expected to sustain double-digit revenue growth and expand margin through premium pricing on leading products.
  
• Robust investment and capacity expansion (e.g., M15X fab and ongoing infrastructure buildout) position SK hynix to meet increasing hyperscale and AI-driven memory requirements, reducing the risk of supply constraints and supporting ongoing topline and earnings growth.
  
• Close strategic partnerships with major AI and GPU companies, as well as visible, multi-year supply agreements, enhance revenue visibility and operational stability, translating to reduced earnings volatility and greater long-term cash flow.
  
• Innovation in ultra-high-density NAND and enterprise SSDs (e.g., 321-layer technology and expansion into compute-caching for AI systems) sets up SK hynix to capture emerging demand from the structural shift of storage within future AI/data center architectures, improving future revenue and profit streams.
  
• Ongoing transition to advanced fabrication nodes and product diversification (GDDR7, LP/DDR server modules), combined with strong operational execution, support sustained margin expansion and a higher long-term return on invested capital.

SK hynix Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SK hynix's revenue will grow by 8.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 37.4% today to 26.5% in 3 years time.
• Analysts expect earnings to reach ₩26119.2 billion (and earnings per share of ₩37356.15) by about September 2028, down from ₩28853.5 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₩52777.0 billion in earnings, and the most bearish expecting ₩22912.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.0x on those 2028 earnings, up from 6.3x today. This future PE is lower than the current PE for the KR Semiconductor industry at 16.8x.
• Analysts expect the number of shares outstanding to grow by 0.2% 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

• Heightened geopolitical tensions and the continued risk of escalating US export controls on technology sales to China present material long-term uncertainties, as SK hynix relies on its China fabs for production, potentially threatening stable revenue streams and exposing the company to sudden regulatory disruptions that could impact both revenues and net margins.
  
• High capital expenditure requirements, including increased and unquantified investment commitments for new HBM capacity, M15X, and Yong-in fab, could constrain free cash flow and limit financial flexibility for R&D and shareholder returns, especially if demand visibility changes or new technologies face delays-impacting overall profitability and liquidity.
  
• Intensifying competition in high-margin HBM and advanced memory markets, with new entrants and established rivals vying for share, creates structural risk of price competition and margin compression; if SK hynix's product differentiation or technological edge erodes, its future earnings and return on capital may be negatively affected.
  
• Ongoing weakness and ambiguous outlook in the NAND market due to soft consumer electronics demand and slow AI-related NAND adoption increases the risk of persistent price pressure and underutilization of investment in NAND capacity, threatening long-term revenue growth and margin stabilization for SK hynix.
  
• Technological transition risks-such as the increased complexity and cost of next-generation DRAM (including HBM4) and delays in the ramp up or mass production of vertically integrated or 3D DRAM nodes-could result in higher costs, reduced yields, or missed market opportunities, negatively affecting future profitability and operational efficiency.

Valuation

• The analysts have a consensus price target of ₩331911.111 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 ₩400000.0, and the most bearish reporting a price target of just ₩255245.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₩98466.5 billion, earnings will come to ₩26119.2 billion, and it would be trading on a PE ratio of 12.0x, assuming you use a discount rate of 10.9%.
• Given the current share price of ₩262500.0, the analyst price target of ₩331911.11 is 20.9% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.