Valuation pressures from the AI chip boom are intensifying. Shares of SK hynix American Depositary Receipts (ADRs) plummeted during their second day of trading, as the sharp volatility seen in South Korean markets has spread to Wall Street, raising global investor doubts about the sustainability of the AI rally.
On Monday, SK hynix ADRs fell 9.3%, nearly erasing the 13% gain from their debut on Friday, bringing the stock price close to the $149 issue price. Peer stocks such as Micron Technology, SanDisk, and Western Digital also declined, with losses exceeding 4% each.
Concurrently, SK hynix shares on the local South Korean exchange plunged 15%, marking their largest single-day drop on record, dragging the Kospi index down by 9% and triggering a market-wide trading halt. Foreign investors were net sellers of approximately 1.7 trillion won (around $11 billion) in Kospi stocks that day, with a significant portion coming from selling in SK hynix.
According to a report by South Korean financial media Yonhap Infomax citing a senior SK hynix executive, the company is exploring the possibility of purchasing South Korean government bonds. However, as of now, SK hynix has not formally announced any such investment plan, and major international media outlets have not independently confirmed the report.
Key Factors Behind the Sell-Off
The immediate catalyst for the sell-off is a market reassessment of profit prospects.
Semiconductor analyst Minsook Chae from Korea Investment & Securities (KIS) published a report estimating that SK hynix's latest quarterly operating profit might be about 8% below market consensus. The report noted the company's high exposure to High Bandwidth Memory (HBM) revenue, where price increases are constrained by long-term supply agreements and are rising slower than those for conventional chips.
The KIS report circulated widely among traders, amplifying market pessimism. Minsook Chae further indicated that the average price increase for HBM might be lower than expected, with a similar trend for hybrid and bulk DRAM chips. However, the analyst added that the slower price growth is not a negative signal but rather reflects an industry trend towards securing long-term contracts.
SK hynix CEO Kwak Noh-Jung stated in an interview last Friday that the memory chip shortage could persist beyond 2030. However, as major memory manufacturers race to expand capacity, concerns are growing about the potential impact on profits when future demand eventually cools.
Post-ADR Debut Dynamics
SK hynix's recent U.S. ADR issuance raised $26.5 billion, setting a new overseas fundraising record and was oversubscribed by more than seven times. It was seen as a key indicator of overseas demand and the durability of the AI theme, but the initial enthusiasm has faded.
Chan H Lee, managing partner at Seoul-based hedge fund Petra Capital Management, commented, "The ADR issuance itself was highly successful, but most of the positive news was already priced into the stock. Monday's weakness reflects a typical 'sell the news' reaction and profit-taking rather than a change in fundamentals."
Nico Rosti, an analyst at MRM Research, noted that SK hynix stock is currently in "deeply oversold" territory, stating, "Another week of declines is possible, but we view this as a buying opportunity. The ADR should rise if the Korean market rebounds."
Leverage and Market Volatility
The Kospi's sharp drop is not an isolated incident; it highlights deeper structural vulnerabilities in the South Korean market. Following the significant outperformance of memory stocks driven by the AI boom, market volatility has increased markedly, with Kospi daily moves of 5% becoming more frequent.
The proliferation of leveraged ETFs tracking SK hynix and Samsung has further amplified price swings. Since their listing in Seoul in late May, some of the largest SK hynix leveraged ETFs have fallen nearly 50% cumulatively. The Korea Exchange has triggered 13 Kospi circuit breakers since 2000, with seven of those occurring this year.
Cross-asset analyst and Coin Bureau founder Nic Puckrin wrote in a report, "SK hynix's near-record decline in Asian markets is no longer just a South Korean issue—volatility is being exported to Nasdaq. The linkage between the two markets is tightening, mutually reinforcing concentrated risks in tech stocks and creating a vicious cycle that equity investors must remain wary of."
Richard Tang, Head of Research at Julius Baer in Hong Kong, stated that volatility is expected to remain elevated until late July, noting, "Initial fund outflows were related to position concentration limits, while recent activity reflects both a technical rotation into ADRs and profit-taking in strongly performing memory stocks."
Potential Use of ADR Proceeds
According to the Yonhap Infomax report citing a senior SK hynix executive, the company is studying the possibility of investing in South Korean government bonds.
As noted, SK hynix has not officially announced such a plan, and it lacks independent confirmation from major international media.
Previous media reports indicated the company planned to repatriate a portion of the funds raised from last week's ADR issuance to South Korea for investment in memory chip manufacturing facilities.
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