Key Points Summary
SK Hynix's second-quarter financial report for 2026 set a new record: revenue of KRW 79.32 trillion (a year-on-year increase of 257% and a quarter-on-quarter increase of 51%), operating profit of KRW 60.54 trillion (a year-on-year increase of 557% and a quarter-on-quarter increase of 61%), with an operating margin as high as 76% (earning KRW 76 for every 100 yuan in sales). However, since the revenue and profit figures fell slightly short of market expectations (by 5% and 6%, respectively), and given that the stock price had already dropped by more than 40% earlier, the U.S. ADRs declined by 9% after the report before recovering, while South Korean stocks opened higher only to fall again by 9%. The market's focus is not on current profitability but on the valuation of future growth potential—the bulls and bears still disagree regarding the sustainability of demand for AI storage.
Detailed Analysis
1. Why Didn't Record Profits Meet Expectations? The Profit Structure Held Back Growth
On the surface, profits were impressive, but they did not meet market expectations. The reason is a change in the profit-making model:
- High HBM Revenue, Low Growth: SK Hynix is a leader in AI-related high-end memory (HBM), and HBM accounts for a larger proportion of its revenue compared to competitors. However, HBM contracts are typically long-term supply agreements (LTAs) with prices fixed in advance, preventing the company from benefiting from sudden increases in spot prices like with regular DRAM (for example, while regular DRAM spot prices rose by 30% quarter-on-quarter, HBM prices remained stable according to the contract).
- Slowing Price Increases for Traditional Products: The rate of price increase for regular DRAM (30% quarter-on-quarter) was slower than in the first quarter, and the increase for NAND was also more modest (50%-55%). This means that despite higher sales volumes of AI-related products, short-term profit margins were constrained by these long-term contracts, resulting in figures that did not meet the market's earlier expectations.
2. Has the Storage Supercycle Come to an End? Management Provides Reassurance
Regarding whether demand for AI storage is cooling down, SK Hynix maintains an optimistic view:
- Positive Demand Outlook: The company expects DRAM demand to grow by about 20% and NAND demand by more than 15% in 2026. Investment in AI infrastructure will continue to grow steadily after 2027, with no signs of a slowdown.
- Product Progress: HBM4 has started to be shipped (with increased volumes in the second half of the year), and HBM4E (the next generation) has been sampled to key customers. New process-based products are also being supplied, solidifying SK Hynix's leading position in high-end AI storage.
- Resolute Expansion Plans: The company plans to maintain high capital expenditures of KRW 40 trillion for 2026 and is accelerating the mass production of new factories and projects. For a company that has experienced multiple cycles, willingness to invest in expansion indicates confidence in future demand.
3. Long-Term Supply Agreements (LTAs): Less Short-Term Profit, but Greater Stability
In the past, the storage industry relied on spot pricing, leading to extreme price fluctuations. SK Hynix has signed LTAs with ten customers, which:
- Advantages: Allow for flexible pricing in response to market changes and provide financial guarantees for contract fulfillment, making future revenue more predictable and reducing the impact of industry cycles (helping it avoid being labeled as a “cycle stock”).
- Disadvantages: These agreements limit short-term profit margins during price increases (as seen this quarter). However, in the long run, securing large customer demand is more important than quick short-term gains.
4. The Core of the Bull-Bear Debate: Can Future Growth Support Current Valuations?
SK Hynix is at the center of the debate regarding the future of AI storage:
- Bull Argument: Record profits, ongoing expansion in AI demand, and a leading product portfolio support long-term growth.
- Bear Argument: Underperformance against expectations, high stock prices earlier in the year, and concerns about potential slowdowns in AI investment create significant short-term pressure. In summary, bulls bet that AI demand will continue to grow for several more years, while bears fear that current valuations have already factored in all future growth potential. This divergence in opinion is behind the volatile stock price movements.
In One Sentence
SK Hynix's current issue is not whether it can make money but how much it can earn in the future. The market remains divided on the long-term prospects for AI storage, which is why such a record financial report has caused such significant stock price fluctuations. For individual investors, the key question is whether AI demand will truly support its high valuation.