RPT-BREAKINGVIEWS-AI's memory chip champion has a value problem

By Yawen Chen

LONDON, Feb 20 (Reuters Breakingviews) - Not long ago, memory chip makers were in crisis. A post-pandemic supply glut in 2023 pushed prices into freefall, wiping out operating profits across the industry. Today, the mood could hardly be more different, as manufacturers rake in record earnings. But for an early frontrunner, South Korea's $448 billion SK Hynix 000660.KS, the artificial intelligence boom has only sharpened its valuation problem.

The dramatic turnaround in the market for data storage semiconductors reflects the staggering sums technology giants from Alphabet's Google GOOGL.O to Amazon.com AMZN.O are spending on data centres. U.S-based Micron Technology's MU.O finance chief Mark Murphy says that sum could reach nearly $800 billion in 2026. That's up from around $200 billion in 2024.

This benefits Micron, SK Hynix and compatriot Samsung Electronics 005930.KS in two ways. First, these facilities are packed with powerful processors from Nvidia NVDA.O and others that require ultra-fast high-bandwidth memory chips. It's an area that SK Hynix has carved out an early lead in, with a 57% market share as of last year's fourth quarter, according to analysts at Huatai Securities. Second, data centres need traditional storage known as solid state drives to hold the vast amounts of information that feed into AI models. SK Hynix's one-fifth market share is second only to Samsung's 32% in this segment as of mid-2025, per Counterpoint Research.

Thanks to a shortage of both, SK Hynix's position looks enviable. Revenue is expected to more than double this year - faster than its rivals, according to analyst forecasts compiled by Visible Alpha. Moreover, SK Hynix's operating profit margin is on track to hit 70% in 2026, per Visible Alpha - well above all its competitors and up from 50% last year.

But even after a 340% rally in its stock in the past year, the company trades at just 4 times 2027 expected earnings, per Visible Alpha, the lowest among memory chip makers. Historically, Korean equities trade at an average 60% discount to U.S. peers, estimate Huatai Securities analysts, due to the country's track record of poor corporate governance and weak shareholder protections. That explains the gap between Samsung, SK Hynix and global peers. And among the two South Korean firms, Samsung is far more diversified.

Another factor is the pair's combined 50% concentration in the MSCI Korea Index which limits how much more passive global funds can allocate to them. South Korea's weighting in the broader MSCI Emerging Markets Index was less than 16% as of end-January. All this means Korean companies benefit less from AI-driven inflows that have propelled U.S. stocks like solid state drive specialist Sandisk, which is up over 1,000% since August.

The problem is not lost on boss Kwak Noh-Jung. SK Hynix in December said it was "reviewing" different options including "a potential listing on the U.S. stock market". That seems a sensible option to bridge the gap.

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CONTEXT NEWS

Memory stocks extended their rally on February 12 after Japanese flash memory supplier Kioxia delivered sharply stronger-than-expected guidance, reinforcing expectations of tight supply conditions through 2026. Sandisk rose 5% on February 12 after a 11% surge the previous day. SK Hynix closed up 3% on February 12.

The South Korean stock market is closed from February 16 to 18 to observe Seollal, a Korean traditional festival and national holiday commemorating the first day of the Korean lunisolar calendar.