KIS lowers SK Hynix's Q2 earnings forecast; shares fall 12%

Original author: Long Yue

Source: Wall Street Journal

On July 13, South Korean local brokerage KIS released a forecast report for SK Hynix's second-quarter performance. SK Hynix is expected to generate revenue of 8.09 trillion Korean won in Q2, up 54% quarter-over-quarter and a substantial 264% year-over-year; operating profit is projected at 6.04 trillion Korean won, up 61% quarter-over-quarter and 556% year-over-year.

The numbers look impressive, but the issue is that the market consensus expectation was 65 trillion KRW, and KIS's forecast was about 8% below consensus.

This deviation directly triggered the market.

After the opening of the Korean stock market, SK Hynix's stock price quickly dropped more than 10%, falling below the 2 million KRW mark, and has corrected by 33% from its historical high on June 25 in just three weeks.

KIS explained in its report that the core reason for the profit shortfall versus consensus was that SK Hynix's revenue mix from HBM (High Bandwidth Memory) was higher than that of its peers, resulting in a higher shipment mix and an ASP growth rate below the market average.

This logic may seem counterintuitive at first—HBM is a premium product, so shouldn’t a higher share mean greater profitability?

The key lies in the pricing structure. HBM is typically priced under long-term supply agreements (LTAs), with relatively fixed contract prices that do not rise sharply in the short term even when market conditions change. In contrast, standard DRAM and NAND have higher price elasticity in the spot market, and their ASPs tend to increase more significantly when overall market prices rise.

SK Hynix's higher HBM share means it benefited less from the price increase during this market upswing compared to its peers.

While spot prices for conventional DRAM and NAND continue to rise—KIS forecasts a ~30% quarter-over-quarter increase in DRAM average selling prices and a ~50% increase for NAND—the overall ASP for SK Hynix has been held back by HBM contract pricing.

KIS explicitly stated in the report that this adjustment is not due to concerns about performance, but rather a revision resulting from the inclusion of pricing assumptions from previously signed long-term supply agreements (LTAs).

This is the result of incorporating the signed LTA into the price assumptions and making realistic adjustments to the forecast, not a concern regarding performance.

KIS simultaneously lowered its operating profit forecasts for 2026 and 2027 by approximately 9% and 11% respectively from previous estimates. However, the brokerage emphasized that as HBM4 begins large-scale shipments starting in the third quarter, rising market prices will drive overall ASP upward, at which point SK Hynix’s ASP growth will return to the market average.

KIS predicts that the operating profit margin will reach a record-high 74.6% in Q2 2026 and continue to rise each quarter thereafter.

The broker maintains its target price of 3.8 million KRW and an overweight rating, viewing this downward revision as a short-term fluctuation that does not alter the medium- to long-term upward earnings trend.

A year-over-year increase of 556% is an extremely strong figure in any industry. But the logic of capital markets is that what matters is not how much it rose, but whether it met expectations.

The market had already fully priced in the consensus expectation of 65 trillion KRW. KIS's forecast is approximately 4.6 trillion KRW lower than this figure, effectively signaling that expectations were too high.

This triggers two layers of concern: first, the direct impact of short-term performance falling short of expectations; second, whether the high proportion of HBM constitutes a structural risk—meaning the more SK Hynix bets on HBM, the more its ASP flexibility is constrained during contract price lock-in periods.

SK Hynix just listed on the U.S. stock market last Friday, and some funds that bet on the new listing chose to cash out after the ADR listing, further increasing selling pressure.

SK Hynix's decline quickly spread to surrounding markets.

In the Hong Kong stock market, the 2x leveraged long ETF on SK Hynix fell over 22% in a single day, and the 2x leveraged long ETF on Samsung Electronics fell over 13%.

A-share memory stock-related names fell in tandem, with several core components including GigaDevice, Beijing Junzheng, Jiangbo Long, and Biwin Storage dropping over 7%.

From a broader perspective, the memory semiconductor sector has entered a correction phase over the past half-month, with some stocks declining over 20% and reaching the technical bear market threshold. This is also driven by global capital reallocating within AI and across markets, including the rotation logic of "selling chips, buying cloud," as well as a temporary rebound in the Hong Kong market attracting capital back.

Despite causing market volatility, KIS's overall stance in the report is not pessimistic.

The broker believes that as the storage industry shifts toward 3- to 5-year LTA contract structures, the core driver of enterprise valuation will transition from "quarterly ASP growth" to "how long high profitability can be sustained."

The KIS report states: "From now on, the focus should be on the sustainability of profitability. The expansion of LTA is reducing the long-standing earnings volatility in the storage industry."

The broker expects SK Hynix’s high profitability to be sustained long-term as contract-based revenue grows and HBM capacity expansion constrains overall supply, leading to a revaluation of its valuation.

The target price of 3.8 million KRW indicates significant upside potential from the current stock price; KIS maintains an overweight rating.