South Korea's SK hynix is set to catapult into the top ranks of American tech stocks when it starts trading in the U.S. on Friday. It could be the next big winner in artificial intelligence.
The memory-chip giant is planning a $26 billion listing of American depositary receipts on the Nasdaq Global Select Market. It adds another company with a market valuation of more than $1 trillion to the U.S. market and is set to be the largest-ever ADR offering.
U.S. investors rarely need to look beyond domestic companies for high-growth opportunities, and a stock that has gained more than 600% in the past 12 months in Korea might seem fully valued. But SK Hynix's investment case is clear.
Beyond raising funds, SK Hynix hopes the ADR listing will close a valuation gap with U.S. peer Micron Technology. Barron's has argued Micron can double from current levels -- and the same case applies to SK Hynix, with added advantages.
SK Hynix's advantage over Micron can be summed up in a sentence: It's bigger, cheaper, and has a closer relationship with the world's most important customer -- Nvidia.
It isn't the biggest memory-chip company -- that distinction belongs to Samsung Electronics. But it is the largest pure play on memory, with higher sales than Micron and without the complication of Samsung's electronics and chip-manufacturing businesses.
Notably, SK Hynix is the dominant player in high-bandwidth memory (HBM), the advanced hardware used in AI servers. SK Hynix had 58% of the HBM market share in the first quarter of this year, according to Counterpoint Research, with Micron and Samsung taking 21% each. That should shield it against the threat of Chinese memory companies undercutting the market for simpler components.
"SK Hynix holds the edge in production scale and maturity...generally speaking, their first-mover advantage is and was their strength," said Ken Mahoney, CEO of Mahoney Asset Management.
SK Hynix is also close with dominant AI chip maker Nvidia. Although Nvidia relies on all three major memory-chip companies, SK Hynix is its biggest supplier. The companies recently strengthened ties through a multiyear agreement in which the Korean company will provide components for Nvidia's supercomputer and robotics technology.
"SK Hynix has been Nvidia's largest memory partner. SK Hynix will continue to be Nvidia's largest memory partner," Nvidia CEO Jensen Huang told reporters at the time of the agreement.
Despite these advantages, SK Hynix is cheaper than Micron, fetching a forward price/earnings ratio of 5.4 times compared with 6.7 times for Micron, according to FactSet. Growth isn't the issue: SK Hynix is expected to increase revenue and earnings at a slightly higher rate than Micron this year, and both companies are locking in long-term supply agreements, which should support margins for years to come.
Goldman Sachs analyst Giuni Lee and colleagues argue SK Hynix deserves a P/E ratio of nine times their forecast for earnings over the next 12 months. They have a price target of 3.5 million won ($2,314) on the company's South Korean shares, implying a 69% increase from current levels.
For believers in the AI trade, the case is straightforward. SK Hynix trades at an unwarranted discount that could narrow once a U.S. listing opens it to a broader investor base. Some fans have already signed up to collectively buy up to $7 billion of its ADRs, including Situational Awareness, a hedge fund run by former OpenAI researcher Leopold Aschenbrenner that's known for making big AI bets.
The flip side is that if AI investment dries up, there are risks to owning SK Hynix stock. The memory-chip industry is historically cyclical: Periods of undersupply are followed by oversupply.
"SK Hynix is the purer AI play, which cuts both ways. Its revenue mix is more concentrated in HBM and in Nvidia specifically. In a downturn customer concentration becomes a liability," said Daniel Newman, CEO of technology research firm Futurum Group.
Another double-edged feature is SK Hynix's exposure to volatile South Korean trading. Although its ADRs will be denominated in U.S. dollars, they carry currency risk through the link to the underlying shares in its home market -- 10 ADRs will represent one common share.
That means SK Hynix is best suited to investors who believe in the sustainability of the AI boom. Big Tech companies are set to spend around $1.5 trillion on global cloud and AI infrastructure in 2027, and BofA analysts estimate memory will represent around 35%-40% of that spending. Long-term supply agreements and an unprecedented supply crunch, with little additional capacity coming online until midway through 2027 at the earliest, should extend the memory cycle for at least another year.
With an extended memory cycle, the debut of SK Hynix should be an easy win for U.S. investors. The ADRs are a cheap and attractive way to play the continuing problem in AI: too much demand and too few chips.
(END) Dow Jones Newswires
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