SK Hynix Shares Surge. Why It's Not Too Late to Buy the Stock.
Shares of SK Hynix(NASDAQ: SKHY) surged after the South Korean memory maker delivered huge growth that easily topped analyst expectations. However, with a forward price-to-earnings (P/E) ratio of 4.5 times 2027 analyst estimates and its DRAM (dynamic random access memory) and HBM (high bandwidth memory) volumes effectively sold out through 2029, the stock still looks like a buy.
SK Hynix is the HBM market leader, commanding around 50% market share and serving as the lead supplier to Nvidia. The company said that HBM4 prices will increase next year, while mass production yields will also improve. This will lead to significant revenue and profit growth in 2027, as recent negotiations have narrowed the profitability gap between HBM and conventional DRAM.
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Meanwhile, the company said HBM demand is currently more than double what it can supply today.
The company is also bullish on the NAND (flash) market, saying that agentic AI and long-context use cases are making it difficult to store everything in HBM and DRAM due to cost and capacity constraints. As such, it believes that a tiered memory architecture that can distribute data across HBM, DRAM, and flash-based SSDs (solid-state drives) is becoming more important. It says that addressing this will sustain the momentum in its NAND business.
Meanwhile, more than half of SK Hynix's volume capacity for 2027 and 2028 is committed under long-term agreements. It currently has 14 signed LTAs with five-year terms. However, it is also already working on extensions with some customers.
Huge revenue growth and margin expansion
As for its third-quarter results, SK Hynix's revenue surged 328% year over year to 104.62 trillion won ($77.9 billion), coming in above the 98.34 trillion won ($73.2 billion) average analyst estimate. Increased prices largely drove the growth. The average selling price (ASP) for DRAM climbed by a high-20s percentage quarter over quarter, while NAND (flash) prices jumped by a mid-20s percentage sequentially. DRAM volumes rose by 10% sequentially, while NAND volumes saw a slight decrease.
Surging memory prices lifted SK Hynix's margins. Gross margins rose from 57% a year ago to 86% and were up 300 basis points quarter over quarter. Operating margins, meanwhile, expanded from 47% a year ago to 80% and were up 400 basis points sequentially. That helped drive a 632% surge in operating profit to 83.33 trillion won ($62 billion), well above the 76.72 trillion won ($57.1 billion) analyst estimate.
SK Hynix also announced a large new 20 trillion won ($14.9 billion) share buyback plan. It will also pay out a 14 trillion-won dividend ($10.4 billion), which includes gains from its investments in Kioxia. In addition, it plans to return 50% of its cumulative free cash flow generated between 2025 and 2027 to shareholders through dividends and buybacks.
Time to buy the stock
While investors can make the argument that memory is cyclical, with SK Hynix's NAND and DRAM capacity sold out for the next three years and prospects for NAND solid, this cycle is clearly different from past cycles, and, as the HBM leader, SK Hynix is uniquely positioned to benefit.
Demand for memory shows no signs of slowing down, and even with increased capex, the big three memory makers just can't keep up with growing demand. The reason is simple. These companies are pouring resources into increasing HBM capacity, and most of their available clean-room space is being dedicated to this advanced memory. However, to increase HBM capacity, they need the same EUV (extreme ultraviolet lithography) machines used to manufacture advanced logic chips such as graphics processing units (GPUs) and central processing units (CPUs), and only one company in the world, ASML, makes these machines. On top of that, HBM uses upwards of three times the wafer capacity as conventional DRAM.
As long as the AI infrastructure market is booming, SK Hynix looks to be in good shape, and at its current valuation, the AI stock is a buy.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ASML and Nvidia. The Motley Fool has a disclosure policy .
SK Hynix Shares Surge. Why It's Not Too Late to Buy the Stock. was originally published by The Motley Fool
