$SKHY

‌Why do shares fall despite record profits?

The last two days for SK Hynix provide a clear answer to the question of why a stock might lose value even after reporting record profits.

The company announced record revenue of 104.6 trillion won and a record operating profit margin of 80% for the third quarter—surpassing the 100 trillion won threshold for the first time in its history. Yet, during the same period, its share price fell sharply, driven by concerns regarding U.S. policies on artificial intelligence.

This situation illustrates that investors are no longer focused solely on the magnitude of earnings, but also on the sustainability of those gains.

What lies within the anatomy of these record profits?

The third-quarter performance reveals what the era of artificial intelligence means for memory chip manufacturers. Revenue surged by 32% quarter-over-quarter and 328% year-over-year. Operating profit reached 83.3 trillion won—an increase of 38% from the previous quarter and 632% compared to the same period last year. This growth was fueled by a more than 40% rise in shipments of server-grade DDR5 memory and the launch of HBM4 products.

A detail that should not be overlooked is the decline in net profit, which fell from 93.9 trillion won in the previous quarter to 39.8 trillion won. This was not due to any operational weakness, but rather to non-operational factors, including 11.6 trillion won in foreign exchange losses and 22.9 trillion won in valuation losses on investment assets. In other words, the factory’s earnings hit a record high, but secondary accounting line items dragged down the reported profit.

What was the underlying reason for the sell-off?

There are two primary dynamics at play.

The first involves political shifts and concerns regarding data centers. The Democrats gaining the upper hand in Congress during the midterm elections has fueled expectations of increased regulatory pressure on data center construction. According to one report, approximately 45% of planned AI data center expansions in the U.S. could be affected by such regulations. This has sparked fears that the growth rate in demand for HBM (High Bandwidth Memory) and server DRAM could slow down.

The second factor is profit-taking and concerns about the industry cycle. Following a strong rally in the first half of the year, the stock fell by as much as 58% from its June peak. Investors are questioning whether an 80% profit margin is sustainable. Furthermore, a deceleration in the rate of increase for memory prices has raised the question: are we at the peak of the cycle?

Why might this time be different?

Despite all the negative sentiment, there are structural factors that distinguish SK Hynix from previous cycles.

Long-term agreements provide greater visibility. The company has already secured more than 50% of its projected capacity for 2027 and 2028 through long-term contracts with 14 key clients. Analyses suggest that even in the event of a memory market crisis similar to the one seen in 2022–2023, prices would need to drop by approximately 60% from their peak for customers to walk away from these contracts—implying that a significant portion of profits would remain protected.

The company’s leadership in HBM and the transition to HBM4 are also critical factors. The company holds a dominant position in the HBM3E market and aims to lead in HBM4 as well. By 2026, HBM3E is expected to account for two-thirds of HBM shipments, with HBM4 gradually increasing its share. These specialized products—critical for AI accelerators—command significantly higher prices and profit margins compared to standard memory.

There are also supply constraints and structural demand at play. The company anticipates that the memory shortage will persist at least until 2030. The market for AI data center infrastructure is projected to grow at an annual rate of 40% through 2030, pointing to a strong foundation of structural demand that extends well beyond short-term fluctuations.

How should one interpret the debate between price and value?

The recent decline in SK Hynix’s stock reflects how the market is reconciling an excellent balance sheet with an uncertain future. While the company’s fundamentals are bolstered by record profitability and long-term contracts, its share price remains sensitive to macroeconomic headwinds and investor sentiment.

In the short term, concerns regarding policy and market cycles may weigh on the stock price; however, in the medium term, long-term agreements and a leadership position in HBM serve to support the company’s underlying value.

While a company might focus on its current earnings, the market asks how long those earnings can be sustained. It is essential to distinguish between operational profit and net profit, while also accounting for one-time items such as currency fluctuations or valuation adjustments. Furthermore, a decline in share price does not necessarily signal the end of the narrative; rather, structural factors—such as the duration of contracts and the unique nature of the products—will determine how the story unfolds. What you should monitor is the proportion and duration of long-term agreements, the pace of the transition to HBM4, and the extent to which data center regulations in the United States are reflected in demand.

This content is for informational purposes only and does not constitute investment advice.

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