SK Hynix is worried about its stock price.

The demand growth across the entire memory market has significantly exceeded expectations, while the adoption of advanced manufacturing processes is also rather complicated. As new factories take time to build, it will be difficult for SK Hynix to fully meet customers' volume demands in the short term.

On October 28, South Korean memory giant SK Hynix (000660.KS) released its financial results for the third quarter of 2026. In the quarter, the company posted revenue of 104.6 trillion won (approximately 526.1 billion RMB), up 328% year on year, marking the first time its quarterly revenue has exceeded 100 trillion won. Its operating profit hit 83.3 trillion won, with an operating profit margin of 80%. Revenue, operating profit and operating profit margin all hit new all-time highs for the company in a single quarter.

"DRAM and HBM products for the next three years have actually been sold out," said Park Joon-deok, Vice President in charge of DRAM marketing at SK Hynix, during the earnings call. DRAM is the commonly referred to memory, while HBM (High Bandwidth Memory) is made by stacking multiple layers of DRAM chips, and is mainly used in tandem with AI chips.

On the day the results were released, SK Hynix's share price rose by as much as 10.89% at one point, and its closing price was roughly half of the all-time high set in late June. During the earnings call, Kim Woo-hyun, Chief Financial Officer of SK Hynix, emphasized that the current share price is undervalued and does not fully reflect the profits and cash flow generated by the company.

With the order book already so full, why is SK Hynix still worried about its share price?

Strong Demand

In the past, most transactions of memory chips were priced based on prevailing market conditions, manufacturers and customers negotiated prices and volumes on a monthly or quarterly basis, and long-term contracts spanning several years were rarely signed. But in this current round of supply shortage driven by AI demand, an increasing number of customers have started to lock in supplies years in advance.

According to Kim Woo-hyun's introduction, up to now, SK Hynix has signed long-term supply agreements with 14 core customers, including major global cloud service providers. The agreements generally last for 5 years, and some customers are still negotiating to extend the term of their existing agreements. The volumes locked in by these long-term contracts have already exceeded 50% of the company's total production capacity in 2027 and 2028.

The "sold out" mentioned by Park Joon-deok includes both the agreements that have been signed and the demands that are under negotiation with customers. According to him, the demands under negotiation are based on customers' specific procurement plans, with a very high possibility of final implementation. In addition, Park Joon-deok also said that in the medium and long term, SK Hynix will maintain the proportion of long-term contracts in its total production capacity at a level similar to the current one, and the production capacity outside long-term contracts will be used to flexibly respond to market changes and the demand for next-generation products.

Kim Woo-hyun predicted that the situation where supply of memory chips falls short of demand may last until 2030. His explanation is that today's AI can plan complex tasks and call multiple tools to execute for a long time, the amount of computing and the data that needs to be generated, transmitted and stored are increasing rapidly, and the demand growth across the entire memory market has significantly exceeded expectations. In addition, the adoption of advanced manufacturing processes is relatively complicated, and the construction of new factories also takes time, so it is difficult for SK Hynix to fully meet customers' volume demands in the short term.

In fact, in the third quarter of 2026, the supply and demand of memory chips remained tight, and prices continued to rise. According to Kim Woo-hyun's introduction at the earnings call, the bit shipment volume of SK Hynix's DRAM (shipment volume calculated by storage capacity) in the quarter increased by about 10% quarter on quarter, and the average selling price rose by nearly 30% quarter on quarter. The bit shipment volume of NAND flash (mainly used in storage products such as solid-state drives) decreased slightly quarter on quarter, and the average selling price rose by about 25% quarter on quarter.

The supply gap for HBM is even larger. Kim Ki-tae, Vice President in charge of HBM Sales and Marketing at SK Hynix, said during the earnings call that the HBM volume requested by customers is more than twice the current available supply of SK Hynix. Recently, some customers have adjusted the specifications of HBM, intending to reduce the number of stacked layers. With fewer layers, the same production capacity can produce more HBM chips. Kim Ki-tae regards this move as a response from customers when supply is limited, with the goal of manufacturing more AI chips and systems with limited HBM.

Regarding the pricing of long-term agreements, Kim Woo-hyun introduced that the price of long-term contracts varies by customer and product, and generally reflects market conditions within the mutually agreed range. The improvement of market conditions and product value can be reflected in the price.

As for the volume and price of HBM next year, SK Hynix has finished negotiations with major customers. Kim Woo-hyun said that the negotiation results reflect the higher product value of the new-generation HBM4, and the profitability gap between HBM and ordinary DRAM will be significantly narrowed. From his statement, ordinary DRAM has risen faster this year, and the profitability of HBM has fallen behind that of ordinary DRAM instead.

TrendForce, a well-known market research institution, pointed out in a report on September 30 that affected by the pricing mechanism of long-term agreements, the increase in server DRAM from some suppliers may lag behind the market average. That is to say, long-term contracts mainly lock in volume, and prices still follow the market, but may move at a slower pace. The institution predicts that the comprehensive average selling price of HBM in 2027 will rise by 121% year on year.

HBM4 has started mass production and shipment in the third quarter of 2026. Kim Ki-tae introduced that the mass production progress is smooth, the yield rate of HBM4 has exceeded the original plan, and the yield target has been raised accordingly. In the fourth quarter of this year, the proportion of HBM4 in SK Hynix's total HBM shipment volume and revenue will exceed that of the previous generation HBM3E.

Kim Ki-tae believes that with the increase in the proportion and price of HBM4, the revenue and profit of HBM next year are expected to increase significantly year on year. Looking ahead, he predicts that the profitability of HBM will remain at a level far higher than the peak of previous industry cycles.

Share Price Halved

In the memory industry, the share prices of listed companies often peak before their financial results. For example, in the previous cycle, SK Hynix's share price hit its then all-time high on May 23, 2018. Even though the operating profit in the second and third quarters of that year continued to set new records, by mid-December 2018, the share price had fallen by more than 35% from its high point.

The industry downturn also came very quickly. In 2022, SK Hynix still recorded an annual operating profit of about 7 trillion won, but it turned to an operating loss of about 1.7 trillion won in the fourth quarter of that year, and posted an annual operating loss of about 7.7 trillion won in 2023.

From past experience, as a typical cyclical stock, the market's pricing of memory stocks has a distinct feature: the closer the company's profit is to the peak, the more the market worries about the downward trend of its share price.

This year, SK Hynix's share price hit an all-time high of 2.987 million won in late June, and the company's financial results have continued to set new records since then. On July 29, SK Hynix released its financial results for the second quarter of 2026, with revenue and operating profit hitting new highs, but its share price fell by 9.61% on the same day. As of the close of trading on October 27, SK Hynix's share price had fallen by about 55% from its high point in June.

The earnings call on October 28 was opened by Kwak Noh-jung, President and Chief Executive Officer of SK Hynix. This is his first appearance at the company's earnings call since he took office in March 2022.

Kwak Noh-jung first thanked shareholders for their trust amid the recent intensifying market volatility, and announced that its NAND flash subsidiary Solidigm will stop evaluating pre-IPO financing and listing plans. According to him, Solidigm had previously been looking for financing methods to expand production, and introducing external capital through listing was originally expected to reduce the company's investment burden and improve its ability to return to shareholders. However, considering the recent turbulence in the financial market and the adjustment of semiconductor stock prices, it is difficult to fully achieve the expected effect through listing at this stage.

Subsequently, Kim Woo-hyun announced the shareholder return plan for fiscal year 2026: SK Hynix will return about 100 trillion won to shareholders, including more than 30 trillion won in cash dividends, and more than 60 trillion won in share repurchase and cancellation, including the 40 trillion won repurchase announced in August and completed last week. Kim Woo-hyun said that this will fulfill the commitment to return more than 50% of free cash flow to shareholders.

Kim Woo-hyun also said when answering analysts' questions that all the return amount other than cash dividends will be used for share repurchase and cancellation. In his view, this is an effective way to enhance per-share value. The company will continue to repurchase shares within the annual scale every quarter thereafter, and the specific amount for each quarter will be determined by the board of directors in combination with factors such as share price, valuation and cash flow.

However, the long-term trend of memory prices depends more on the industry's supply and demand. When profits are high, memory manufacturers tend to increase investment, but with the concentrated release of new production capacity later, product prices are prone to turn downward. SK Hynix is also increasing its investment. Kim Woo-hyun said that the company's capital expenditure in 2027 will increase significantly compared with 2026, mainly for increasing the proportion of advanced manufacturing processes, ramping up production capacity of new factories, and building infrastructure in South Korea and overseas regions.

When asked whether capacity expansion will lead to oversupply like in previous cycles, Kim Woo-hyun said that the company is indeed pushing forward medium and long-term investment, but as investment and factories increase, supply will not necessarily increase accordingly. This is because the proportion of high-performance products such as HBM is increasing, the manufacturing processes are becoming more and more complex, and production requires more resources, leaving increasingly limited room to increase bit output by shrinking process nodes (making circuits on chips smaller).

He also said that relevant investments will be implemented in phases. For new factories, the main plant buildings will be constructed at an accelerated pace, while clean rooms will be opened in stages. Equipment delivery and mass production ramp-up will be arranged according to demand, and the scale and timing of investment will also be determined with reference to the medium and long-term demand obtained through negotiations with customers. In other words, in addition to locking in sales volume, long-term contracts have also become one of the bases for SK Hynix to arrange its capacity expansion pace.

Kim Woo-hyun predicted that limited by actual supply conditions, the growth rate of satisfiable DRAM demand in 2027 will be around 25%, similar to that of this year. He also said that on the demand side, the cost pressure brought by rising memory prices and supply shortages will reduce the shipment volume of PCs and mobile devices, but the growth in demand for AI infrastructure is enough to offset this decline.

Regarding the market discussion on the pace of AI investment, Kim Woo-hyun's view is that customers are evaluating the feasibility and profitability of individual projects more carefully, and determining the timing and pace of investment accordingly, and the momentum of AI investment will continue. In addition, more and more entities are investing in AI. In the early stage, AI investment was concentrated in large technology companies, and adjustment of investment by a single company might cause fluctuations in overall demand. But now, non-technology enterprises building their own AI infrastructure, sovereign AI projects led by governments of various countries, and local deployment demands are all increasing. Even if some projects slow down, other demands will make up for the gap.

Synthesizing the statements of several SK Hynix executives during the earnings call, affected by factors such as HBM consuming more production capacity and clean rooms opening in batches, the supply expansion in this round of memory cycle may be slower than previous rounds. Manufacturers like SK Hynix have also gained greater certainty about their sales volumes in the next few years with the help of long-term contracts.

However, the prices in long-term contracts still float with the market, and investors' pricing of memory stocks is still generally based on the reference of past cycles.

At the end of the earnings call, Kwak Noh-jung mentioned that what is more critical than the continuously record-breaking financial results is that the business environment supporting the performance is changing. The customer trust accumulated by SK Hynix through its technological leadership is being transformed into long-term agreements, giving it a clearer view of medium and long-term demand and a more stable foundation for sustained profitability.

In his view, SK Hynix has the opportunity to enter a different growth stage from the past. "Our current task is to convert these changes into lasting competitive advantages."

This article is from the WeChat official account "The Economic Observer", written by Zheng Chenye, and published by 36Kr with authorization.