Goldman Sachs Outlines 8 Key Issues in South Korea’s Memory Sector

Original author: Bao Yilong

Source: Wall Street Journal

Samsung Electronics and SK Hynix have seen significant recent corrections in their stock prices, with valuations falling to extremely pessimistic levels; however, Goldman Sachs believes the fundamentals do not support such low pricing and has reaffirmed buy ratings for both companies.

Wind Rider Trading Desk update: On August 4, Goldman Sachs’ Giuni Lee team released a research report systematically addressing eight key concerns currently facing South Korea’s memory industry, including HBM pricing outlook, long-term agreement structures, inventory levels, the impact of CXMT, shareholder returns, and the effects on SK Hynix’s U.S. ADR.

Analysts believe that most of the above concerns have been overinterpreted by the market, and the actual supply and demand dynamics continue to support high storage prices.

Under this backdrop, Samsung Electronics and SK Hynix shares have declined by 23% and 35%, respectively, over the past month, bringing both companies’ 2027 expected P/E ratios to approximately 3.5 to 3.6 times and their price-to-book ratios to just 1.4 to 1.6 times.

Goldman Sachs noted that this valuation implies extreme market skepticism about the sustainability of earnings for both companies, which clearly diverges from their actual fundamental conditions.

Goldman Sachs expects the average selling price of HBM from Samsung Electronics and SK Hynix to rise by approximately 87% and 100% year-over-year respectively by 2027, both nearing $2.9 per Gb. Of this increase, about 60% comes from price growth within similar products, with the remainder driven by product mix improvements.

The core logic behind this judgment is that supply and demand remain consistently tight.

The report notes that demand for HBM driven by AI servers continues to outstrip supply, while the yield of the latest-generation HBM has significantly declined due to more advanced process nodes and higher stacking layers, compounded by a higher conversion ratio between HBM and standard DRAM, further increasing the difficulty of expanding supply.

Goldman Sachs expects the HBM supply-demand gap in 2027 to be tighter than this year.

Another key factor is the significant price difference between HBM and standard DRAM.

As of the second quarter of 2026, due to standard DRAM contracts being negotiated on a monthly or quarterly basis, their pricing has surpassed HBM, which is primarily priced under annual fixed contracts, creating a clear inversion.

Goldman Sachs expects the average price of standard DRAM to rise from approximately $0.5 to $0.6 per Gb at the end of 2025 to about $2 by the end of this year, at which point HBM will likely reestablish a price premium and move toward the operating profit margin levels of standard DRAM.

Goldman Sachs' forecast for SK Hynix's average HBM price is approximately $2.9 per Gb, about 24% higher than the Bloomberg market consensus.

According to this estimate, HBM revenue as a percentage of Samsung and SK Hynix's total DRAM revenue will rise from approximately 8% and 14% this year to 16% and 22% by 2027, and further increase to 18% and 25% in 2028.

As market expectations of long-term storage supply shortages continue to strengthen, both suppliers and demanders are actively advancing the signing of long-term agreements (LTAs).

Goldman Sachs believes that, based on disclosed information and channel research, LTA terms are tilting in favor of suppliers along four dimensions: longer terms, broader coverage, more favorable pricing structures, and stronger enforceability.

Regarding contract terms, most suppliers indicated that contracts are primarily five-year terms, with some clients opting for three-year terms. Samsung disclosed on its earnings call that its LTAs are typically based on five-year terms and are renewed annually through a rolling renewal mechanism, theoretically extending the contract duration beyond five years.

In terms of coverage, the target is increasing from 50% to 60%–70%. Specifically:

• SanDisk has signed contracts with five customers, covering approximately one-third of its shipments through 2027, with a long-term target of 50%.
• Micron has signed 16 strategic customer agreements, covering approximately 20% of DRAM shipments and one-third of NAND shipments, with the ultimate goal of achieving LTA revenue accounting for over 50%.
• Hynix stated that it has completed negotiations on approximately ten long-term agreement terms;
• Samsung has disclosed that it has signed agreements with the top five global data center customers and is currently in final negotiations with five additional major clients, with expected multi-year contract volumes reaching approximately 60% to 70% of planned capacity upon signing.

In terms of pricing structure, there is an evolution toward positive "price range" and "floor price protection" mechanisms.

Micron has explicitly stated that its largest contract includes price caps and floors based on market prices in the second quarter of 2026, and even at the floor price, the gross margin remains above historical peak levels.

Samsung stated that it will adopt different pricing models based on customer segments and product categories, and has set a floor price for general products to mitigate risks from market price fluctuations.

In terms of enforceability, the advance payment mechanism is the most notable distinction of this round of long-term agreement terms compared to previous cycles:

• SanDisk discloses financial guarantees (including advance payments) exceeding $11 billion;
• Micron is expected to receive $22 billion in cash deposits and related financial commitments;
• Samsung stated that the contract includes a large upfront payment in the form of a deposit, and approximately one-quarter of the total contract upfront payment has already been received. As more contracts are finalized, the scale of upfront payments will continue to expand.

Concerns about elevated inventories among memory module manufacturers have recently intensified.

Goldman Sachs acknowledged that module inventory has indeed increased, particularly against the backdrop of weak consumer demand in smartphones, PCs, and other end markets. However, the key point is that the module market accounts for only a low single-digit percentage of the overall storage market, so its actual impact on industry fundamentals is limited, with the effect being more psychological than structural.

From a more critical perspective of suppliers and end customers, inventory levels are healthy.

By the end of the second quarter of 2026, Goldman Sachs estimates that Samsung and SK Hynix’s DRAM and NAND inventories are each within 2 to 4 weeks, below the normal level of approximately 4 to 5 weeks and far below the typical levels of over 10 weeks seen before previous downturns.

Given that supply growth is expected to remain below demand growth over the next 12 to 18 months, this low-inventory state is anticipated to persist.

On the end-customer side—particularly server customers—even though procurement has been robust over the past few quarters, inventory levels will remain within normal ranges, as products acquired are largely used directly for immediate production.

Recent market concerns over an oversupply of NAND have intensified, with some short sellers citing the decline in NAND spot prices as evidence. Goldman Sachs holds a different view.

From a supply and demand perspective, Goldman Sachs expects the NAND supply-demand gap in 2027 to widen further compared to this year. The main reason is that major suppliers are focusing their capital expenditures on DRAM, while NAND expansion is primarily driven by process upgrades rather than wafer capacity increases, leading to projected supply growth that will continue to lag behind demand in the medium term.

From a demand structure perspective, Goldman Sachs estimates that enterprise SSD demand will increase from 474 EB to 755 EB between 2026 and 2028, with year-over-year growth rates of 66%, 31%, and 22% respectively.

Despite some weakening in consumer demand, Goldman Sachs stated that its channel research shows enterprise SSD demand still has room to grow, sufficient to offset consumer-side pressures.

Regarding the recent weakness in spot prices, Goldman Sachs noted that the decline was concentrated primarily in the TLC 512Gb specification, while other specifications such as TLC 1Tb remained stable.

Notably, the price of TLC 512Gb has risen nearly 600% over the past year, significantly outpacing the more than 400% gains of most other products; the current pullback is essentially a normal correction following its earlier strong outperformance.

South Korean storage manufacturers failed to provide clear statements on specific return plans during their recent earnings calls, leaving some investors disappointed.

Goldman Sachs noted that on August 3, following the announcement of its shareholder return plan, Kioxia, a Japanese storage manufacturer, saw its stock rise 6% in a single day, while Samsung and SK Hynix both declined by 9% on the same day. Goldman Sachs believes this divergence is at least partially due to differing expectations around shareholder returns.

Nevertheless, Goldman Sachs noted that both Samsung and SK Hynix explicitly stated during their earnings calls that they are actively reviewing various shareholder return options.

Samsung's current three-year shareholder return policy expires this year, with a commitment to return 50% of three-year free cash flow to shareholders.

Goldman Sachs believes there is upside to the current Bloomberg consensus dividend per share of KRW 8,638 and has updated its forecast to KRW 9,500. For SK Hynix’s three-year policy covering 2025 to 2027, Goldman Sachs also expects actual dividends to exceed market consensus.

In addition to increasing dividends, Goldman Sachs noted that the repurchase announcement would be warmly welcomed by the market, especially given the recent significant decline in the stock price. For Hynix, repurchasing and retiring shares may be one effective way to offset the dilution effect caused by ADR listings.

SK Hynix completed its U.S. ADR listing on July 10, and since then, the ADRs have consistently traded at a premium to the domestic share price, with an average premium of approximately 26% and a current premium of about 30%.

Meanwhile, Hynix's domestic shares still trade at a discount of approximately 41% to Micron and about 30% to Hynix ADRs on a 12-month forward P/E basis.

Goldman Sachs attributes the above premium/discount difference to two factors:

• First, there are procedural restrictions on the conversion between ADRs and domestic stocks, leading to segmentation among investor groups;
• Second, the number of ADRs issued is extremely limited, accounting for only about 2.4% of the total shares.

Hynix has stated that ADRs can be freely converted into domestic shares, but converting domestic shares into ADRs is subject to conversion limits and requires a regulatory filing process that can take several weeks or longer.

Hynix Chairman Choi Tae-won expressed openness to issuing additional ADRs. Nevertheless, referencing the longstanding premium of TSMC ADRs, Goldman Sachs believes that as long as the bidirectional conversion mechanism is not substantially improved, the premium of Hynix ADRs relative to domestic shares will persist.

In the long term, ADR listing provides global institutional investors with direct access, helping Hynix gradually narrow its historical valuation discount compared to international peers.

SK Hynix reported revenue of 79.3 trillion KRW and an operating profit of 60.5 trillion KRW in the second quarter of 2026. The operating profit aligned closely with Goldman Sachs’ forecast of 59.1 trillion KRW but was approximately 7% lower than the Bloomberg consensus estimate of 65 trillion KRW.

Goldman Sachs believes the primary reason for the performance below market expectations was that DRAM average selling prices fell short of forecasts, with actual sequential growth of approximately 29%, below Goldman Sachs’ prior estimate of 39%. Specifically, average selling prices for standard DRAM have begun reflecting previously contracted prices with customers, while HBM average selling prices were lower than expected due to limited progress in transitioning the product mix to HBM4.

Looking ahead to the third quarter, Goldman Sachs expects DRAM shipment volumes to increase by approximately 10% quarter-over-quarter, with average selling prices rising by about 19% quarter-over-quarter, primarily driven by the ramp-up of HBM4 production and improved product mix from the expansion of 1c nm DRAM, corresponding to an estimated operating profit of around 77 trillion Korean won, largely in line with market consensus.

Goldman Sachs also noted that Hynix has greater exposure to ordinary DRAM price elasticity compared to some peers that have locked in contracts with price caps, meaning the company’s upside potential could be more significant if prices outperform expectations.

With ChangXin Memory Technologies completing its IPO, investor concerns are growing over Chinese memory manufacturers disrupting global supply and demand dynamics.

Goldman Sachs believes that ChangXin Memory Technologies' expansion will primarily serve domestic demand and have limited substantive impact on the global supply-demand imbalance.

From a technical standpoint, Goldman Sachs, citing TrendForce data, notes that CXMT’s mainstream process is currently equivalent to the 1z node, while Samsung and SK Hynix are in the transition phase from 1a/1b to the 1c node.

From a product structure perspective, ChangXin Memory's mobile DRAM shipments are approximately 70% LPDDR4(X), while Samsung and SK Hynix have achieved a 75% to 85% share of LPDDR5(X) in their mobile DRAM, indicating a clear misalignment in product positioning.