(Bloomberg) — Shares of South Korea’s SK Hynix Inc., a major supplier to Nvidia Corp., have risen more than 90% in the past year, and Wall Street is predicting further gains.
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No fewer than 19 analysts have raised their forecasts for the company, the leading supplier of high-bandwidth memory chips for Nvidia’s artificial intelligence products, in the past month. Reasons they cited include the sky-high potential for AI and the prospect of a positive surprise in this month’s earnings.
Goldman Sachs Group Inc. on Tuesday raised its price target to 290,000 won ($210), implying a potential gain of 25% from the day’s close. Citigroup Inc. last week raised its forecast to 350,000 won, more than 50% higher than the current 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 treats 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 reports earnings on July 26, according to the median of estimates compiled by Bloomberg. That would continue a turnaround from last year’s losses amid a recovery in memory chip prices helped by demand for high-end devices for AI applications.
Citi reached its price target of 350,000 won, the most optimistic among analysts’ forecasts compiled by Bloomberg, by taking earlier peaks in SK Hynix shares and discounting them slightly, said Peter Lee, head of global technology and communications at Citigroup Global Markets Korea Securities Ltd.
The demand for HBM may not be fully reflected yet because the world is not yet aware of the potential of AI, Lee said, referring to the earlier introduction of smartphones. “Because this is a market that didn’t exist in the past, we’ve never seen how far it can go.”
Become expensive
Still, some investors say there is reason to be cautious as multiples rise. SK Hynix now trades at 2.9 times book value, making it the most expensive since at least 2011, according to data compiled by Bloomberg.
“We’ve entered uncharted territory in terms of valuation,” said Yoon Joonwon, a fund manager at DS Asset Management Co. in Seoul. “I think earnings will beat market expectations this year and next, but markets are still uncertain about that.”
Investors are also getting nervous.
SK Hynix shares fell as much as 4.7% on Thursday after local media reports that Samsung Electronics Co. will soon hold talks with Nvidia to supply the U.S. 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 a $75 billion investment plan through 2028 on June 30. Increasing production could push down chip prices and raise the specter of a downturn in the memory industry.
“Because this is an untrodden path, volatility is inevitable,” Citigroup’s Lee said.
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