(Bloomberg) — Shares of South Korea’s SK Hynix Inc., a key supplier to Nvidia Corp., have jumped more than 100% in the past year and Wall Street is forecasting more gains.
Bloomberg’s Most Read
No fewer than 19 analysts updated their forecasts last month for the company, the largest supplier of high-bandwidth memory chips for Nvidia’s artificial intelligence products. Reasons given include AI’s enormous potential and the prospect of a positive earnings surprise this month.
Goldman Sachs Group Inc. upgraded its share price target to 290,000 won ($210) on Tuesday, implying a potential gain of 25% from that day’s close. Citigroup Inc. last week raised its forecast to 350,000 won, about 50% above the current share price.
“The current stock valuation does not fully reflect the potential of high-bandwidth memory chips,” said Roh Jongwon, chief investment officer at Infinity Global Asset Management Co. in Seoul. “The market is treating HBM’s valuation the same as traditional memory chips, but HBM is almost twice as profitable.”
SK Hynix will report a second-quarter operating profit of 5 trillion won, the highest in six years, when it announces earnings on July 26, according to median estimates compiled by Bloomberg. This would continue the recovery from last year’s losses amid a recovery in memory chip prices, helped by demand for high-end devices for AI applications.
Shares of SK Hynix rose 2.6% on Friday after Samsung Electronics Co. reported the fastest pace of sales and profit growth in years.
Citi hit its target price of 350,000 won – the most optimistic among analyst forecasts compiled by Bloomberg – by taking advantage of previous spikes in SK Hynix shares and adding some discounts, said Peter Lee, head of global technology and communications at Citigroup. Global Markets Korea Securities Ltd. .
Demand for HBM may not yet be fully reflected as the world is unfamiliar with the potential of AI, Lee said, citing the previous introduction of smartphones. “Because it’s a market that didn’t exist in the past, we’ve never seen how far it can go.”
Getting expensive
Still, some investors say there is reason to be cautious as multiples rise. SK Hynix is now trading at 2.9 times book value, making it the most expensive since at least 2011, according to data compiled by Bloomberg.
“We have entered uncharted territory in terms of valuation,” said Yoon Joonwon, a fund manager at DS Asset Management Co. in Seoul. “I believe its profits will exceed market expectations this year and next, but markets are still uncertain about this.”
Investors are also getting nervous.
SK Hynix shares fell as much as 4.7% on Thursday following local media reports that Samsung will soon enter talks with Nvidia to supply the US company with its own version of HBM chips. Samsung later denied the reports.
There are also concerns about a potential oversupply of memory chips after SK Hynix announced on June 30 a $75 billion investment plan through 2028. Increased production could depress chip prices and increase the spectrum of a slowdown in the memory industry.
“As this is a path not yet taken, volatility is inevitable,” said Citigroup’s Lee.
–With assistance from Jeran Wittenstein and Tan Hwee Ann.
(Updates security share gain, lede, also on SK Hynix trade in sixth paragraph.)
Bloomberg Businessweek Most Read
©2024 Bloomberg LP
