To The Moon

Today, South Korean stocks plunged, with the $CSOP KOSPI(03121)$ index at one point falling more than 7%, breaking below the psychologically important 6,000-point level and approaching its July low:

On the news front, Broadcom CEO Hock Tan said at an event in Singapore yesterday that most companies see no return on their AI computing investments, questioning the long-term viability of money-losing AI labs. He said: "Many investors don't really know what they're investing in. They set absurdly high expectations, only to realize in the end that they're practically in a casino." $Broadcom (AVGO)

Tan also noted that several AI companies, including OpenAI, lose tens of billions of dollars each year. Such services require massive spending on high-end chips, data centers, and model R&D, and the industry as a whole has yet to find a sustainable business model — insufficient capital may become the next bottleneck constraining industry growth.

Beyond Broadcom, major tech companies have recently tried to temper expectations about the near-term benefits and potential threats of AI. Yesterday, executives from TikTok and Microsoft warned that AI hype is overheating, signaling that the technology is not yet mature and that cybersecurity risks are more pressing.

Affected by this, U.S. tech stocks fell broadly overnight:

$NVIDIA(NVDA)$ dropped more than 1.2%, $SK hynix(SKHY)$ fell over 4%, and $SanDisk Corp.(SNDK)$ plunged nearly 6%.

As alarms sound over AI overheating, memory chip competitive pressure is intensifying. Recently, $Cxmt Corporation(688825)$ announced technological breakthroughs in DRAM devices, the 4F² architecture, and hybrid bonding, and confirmed plans to launch next-generation DDR5 RDIMM products by the end of 2026.

Reportedly, Samsung and SK Hynix are also researching this architecture, and markets fear that CXMT's progress could worsen the competitive landscape in memory. As a result, Samsung Electronics fell as much as 7% today, and SK Hynix plunged nearly 9% at one point!

At present, today's crash in the Korean market appears to reflect investors' concerns about the sustainability of memory chip demand beyond 2028. Fundamentally, however — whether memory chips or other semiconductors — supply still falls short of demand. For example, Nanya Technology expects DRAM prices to continue rising in Q4, with varying increases across products.

Although semiconductor demand remains strong, the KOSPI has already fallen more than 34% from its June high, broken below its 200-day moving average, and foreign investors are accelerating their exit, with net selling of over $6 billion in KOSPI stocks in October alone.

Last Thursday, Samsung Electronics released its Q3 preliminary earnings, with revenue of approximately 195 trillion won, up 126.6% year-on-year, setting a new record for the fourth consecutive quarter. Operating profit was about 107.4 trillion won ($80.2 billion), up 782.5% from a year earlier, beating market expectations of 105.7 trillion won.

From a valuation standpoint, Samsung Electronics trades at just 8.3 times earnings, a five-year low:

With such a low valuation and blockbuster earnings, Samsung's stock hasn't risen — it has fallen — while the KOSPI has entered a bear market, which many investors find hard to understand.

In fact, the market's concern is that such strong profitability in memory stocks is unsustainable.

Based on Q3 operating profit, Samsung Electronics' operating margin reached 55% — seemingly not that extreme. But that figure includes Samsung's display, TV, and smartphone businesses. Looking only at memory, margins are much higher: $SK hynix(SKHY)$ 's operating margin is 76.3%, and $Micron Technology(MU)$ 's is 80.7% — even more profitable than NVIDIA!

Such profitability is clearly unsustainable; it's simply the result of prices surging amid tight supply. Once there's any sign of trouble on the demand side, memory stocks will collapse.

At present, the capex growth of major U.S. cloud service providers is approaching an inflection point. Whether Google, Microsoft, or Amazon, free cash flow is now almost entirely consumed by data center construction. To avoid missing the AI wave, they are even issuing debt and even raising equity financing. $Alphabet(GOOG)$ $Microsoft(MSFT)$ $Amazon.com(AMZN)$

With capital stretched thin, AI capex growth is bound to slow. Then, as memory chip capacity expands, the supply-demand gap will gradually narrow, and chip price increases may moderate — or even reverse.

At that point, the profit declines at Samsung Electronics, SK Hynix, and other memory stocks will be enormous. Smart money has already started to exit — which is why, over the past few months, Korean stocks have kept falling even as major companies keep warning about memory chip shortages.

Beyond Korea, A-share tech stocks have also crashed recently. The STAR 50 Index has plunged 38% from its peak, and the ChiNext Index has fallen below its annual moving average, entering a bear market.

By contrast, while some U.S. semiconductor stocks have pulled back from all-time highs, they remain at elevated levels — a world apart from the trends in Korea and A-shares. The difference lies in the fact that leading U.S. semiconductor stocks enjoy favorable competitive positioning, while Korean and A-share companies sit further downstream in the supply chain, face greater competition in similar products, and are more vulnerable to capacity expansion and shifting AI expectations.

Going forward, be careful with semiconductor stocks!