Innovation

SK Hynix Reports Record Quarterly Profit

SK Hynix, one of the world’s largest memory chipmakers, announced on Thursday that its operating profit in the June quarter reached its highest level since the second quarter of 2018, rebounding from a loss of 2.88 trillion won in the same period a year ago. This remarkable turnaround was driven by the continuous rise in the prices of its memory products, thanks to strong demand for AI memory, including high-bandwidth memory (HBM). As a result, the company reported a 32% increase in revenue compared with the previous quarter.

Quarterly Revenue and Profit Figures

SK Hynix’s second-quarter profit surged to its highest level in six years, underpinned by its leadership in advanced memory chips crucial for artificial intelligence (AI) computing. Here are SK Hynix’s second-quarter results compared with LSEG SmartEstimate, which is weighted toward forecasts from analysts who are more consistently accurate:

• Revenue: 16.42 trillion Korean won (approximately $11.86 billion), vs. 16.4 trillion Korean won expected.
• Operating profit: 5.47 trillion Korean won, vs. 5.4 trillion Korean won expected.

Operating profit in the June quarter reached its highest level since Q2 2018, rebounding from a loss of 2.88 trillion won in the same period a year ago. Revenue from April to June increased 124.7% from 7.3 trillion won logged a year ago. This marked the highest quarterly revenue ever in the firm’s history, according to LSEG data available since 2009.

Rising Demand for AI Memory Products

The South Korean giant attributed its impressive performance to the continuous rise in overall prices of its memory products, driven by strong demand for AI memory, including high-bandwidth memory (HBM). The company supplies HBM chips catering to AI chipsets for companies like Nvidia. This rising demand led to a significant 32% increase in revenue compared with the previous quarter.

Stock Market Reaction

Despite the strong earnings report, shares of SK Hynix fell as much as 7.81% on Thursday morning. This decline was influenced by the broader market trend, as South Korea’s Kospi index lost as much as 1.91% following a sell-off in U.S. tech stocks overnight, which was triggered by disappointing earnings reports from Alphabet and Tesla. These reports provided investors with their first look at how megacap companies fared during the second quarter.

Future Outlook and AI Server Demand

In its earnings call on Thursday, SK Hynix expressed optimism about the second half of the year, expecting strong demand from AI servers to continue, along with a gradual recovery in conventional markets with the launch of AI-enabled PC and mobile devices. The company plans to capitalize on this strong AI demand by continuing its leadership in the HBM market through the mass production of 12-layer HBM3E products. SK Hynix expects to begin mass production of the 12-layer HBM3E this quarter, after providing samples to major customers, and aims to ship to customers by the fourth quarter.

Tight Supply of Memory Products

Memory leaders like SK Hynix have been aggressively expanding HBM capacity to meet the booming demand for AI processors. HBM requires more wafer capacity than regular dynamic random access memory (DRAM) products, a type of computer memory used to store data. SK Hynix acknowledged the tight supply situation for conventional DRAM, which is also struggling with supply constraints. The company indicated that investment needs are rising to meet the demand for both conventional DRAM and HBM, leading to higher capital expenditure levels than initially expected for this year.

Long-Term Market Expectations

According to SK Kim of Daiwa Capital Markets, tight HBM and memory supply are expected to persist until 2025 due to bottlenecks in HBM production. Kim anticipates a favorable price environment to continue, with SK Hynix expected to record robust earnings in 2024-25, benefiting from its competitiveness in HBM for AI graphics processing units (GPUs) and high-density enterprise SSDs (eSSDs) for AI servers. This expected strong performance could lead to a rerating of SK Hynix's stock.

AI Boom and Memory Chip Supply

The explosive adoption of AI, fueled by large language models such as ChatGPT, has stretched the supply of high-bandwidth memory chips. The AI boom is expected to keep the supply of high-end memory chips tight this year, analysts have warned. In May, both SK Hynix and Micron reported being out of high-bandwidth memory chips for 2024, with stock for 2025 also nearly sold out. Large language models require a substantial amount of high-performance memory chips, which enable these models to remember details from past conversations and user preferences, allowing them to generate humanlike responses.

Market Leadership and Future Plans

SK Hynix has maintained a dominant position in the high-bandwidth memory chip market, having been the sole supplier of HBM3 chips to Nvidia before rival Samsung reportedly cleared tests for the use of its HBM3 chips in Nvidia processors for the Chinese market. Looking ahead, SK Hynix plans to ship the next generation 12-layer HBM4 from the second half of 2025, reinforcing its market leadership and technological advancement.

Investment and Production Expansion

To meet the growing demand for AI processors, SK Hynix is investing heavily in expanding its HBM capacity. The company highlighted that the investment needs for both conventional DRAM and HBM are rising, necessitating higher capital expenditure levels than initially expected for this year. Despite the anticipated overcapacity next year due to increased industrial investment, a significant portion of it will be utilized to ramp up HBM production, ensuring that the tight supply situation for conventional DRAM is likely to continue.

Analysts' Expectations and Market Dynamics

Analysts, including SK Kim of Daiwa Capital Markets, expect tight HBM and memory supply to persist until 2025, creating a favorable price environment for memory products. This scenario is expected to drive robust earnings for SK Hynix in the coming years, leveraging its competitiveness in HBM for AI GPUs and high-density enterprise SSDs for AI servers. The ongoing AI boom and the resulting high demand for advanced memory chips are critical factors shaping the market dynamics and SK Hynix's strategic direction.

Conclusion

SK Hynix’s record quarterly profit highlights its strong position in the memory chip market, driven by the rising demand for AI memory products. The company’s focus on expanding HBM capacity and maintaining technological leadership is expected to sustain its growth momentum. Despite the immediate stock market reaction, the long-term outlook for SK Hynix remains positive, supported by favorable market conditions and strategic investments in advanced memory technologies. As the AI boom continues to drive demand for high-performance memory chips, SK Hynix is well-positioned to capitalize on this trend and deliver robust financial performance in the coming years.