SK hynix Stock Jumps as AI Memory Expansion Accelerates. How to Play SKHY Here.

SK Hynix (SKHY) is back on everyone's mind as the South Korean memory giant announced plans to construct its new manufacturing facility in the Miyagi prefecture of Japan. The possible investment reportedly runs into trillions of won, according to local Japanese media, as SK Hynix gears itself up for the future rise in memory demand across the globe.

This timing is fascinating as the artificial intelligence infrastructure is gobbling more and more of high-performance memory and SK Hynix appears to be one of the companies to reap the benefits due to its leading position in high bandwidth memory (HBM).

About SK Hynix Stock

South Korea-based SK Hynix is among the largest memory semiconductor manufacturers that make DRAM, NAND flash, and HBM products, which are widely used in AI accelerators and data centers. The current market capitalization of the company amounts to around $1.19 trillion.

SKHY stock is trading at about $155. That puts it approximately 20% below its 52-week high of $194.80, and yet it climbed up by almost 25% from the 52-week low of $124.80. The recent reports regarding manufacturing plans were initially supportive of the price movement, helping it grow by more than 2%, while the stock was up 0.9% during Friday trading. Today's session so far has been less kind to SKHY, though, and it is down over 5% as of this writing.

One of the most intriguing features of the company is its valuation. The stock is traded at around 6.1 times of its forward earnings and the price-to-sales (P/S) ratio of 8.6 times. The forward P/E ratio of 6 times doesn't look like a terribly high of a valuation for a business with fast-growing profits, though it is important to keep in mind that memory is a cyclical business and current profits cannot necessarily be extrapolated into the future.

That is why this proposed investment into Japan is important since constructing substantial new capacity involves huge capital expenditures, though at the same time SK Hynix tries to strike a balance between expanding capacity and not risking adding excessive supply. Management has specifically stressed the importance of keeping its capital expenditure discipline as part of preparation for future growth opportunities.

SK Hynix Reports Extraordinary Earnings

The company announced its excellent Q2 earnings report on July 29, reporting revenues of 79.32 trillion won and an operating profit of 60.54 trillion won. The revenues grew 257% year-over-year (YoY), and operating profit grew by 557%. The operating margin reached 76%, and the first-half revenue exceeded the mark of 100 trillion won.

More importantly for the investors, these numbers also provide some fundamental reasons for considering the capacity expansion plans. According to the company, its extraordinary results in Q2 have been driven by investments into AI infrastructure and sales of higher-value products for AI servers. In other words, the company is not only thinking about constructing another factory based on some potential future needs, but also for the AI demand is already showing up in its results.

And it is HBM that plays a vital role here. SK Hynix says that its HBM4 products have met the required customer speeds with competitive power efficiency and manufacturing economics. It is important, as the next step of AI infrastructure construction will not be based on just increasing computing power but will also require feeding accelerators with data, which will require sufficient memory capacity.

Another important signal is that the company has established long-term agreements with around 10 key customers, including multi-year agreements designed to meet structural demand growth. This may add visibility before any additional manufacturing capacity is brought to life.

However, one should also pay attention to the other side of the coin, as the memory manufacturers used to suffer from excessive supply created by aggressive additions of capacity. And the bulls' interpretation of the construction of a factory in Miyagi Prefecture will depend on rapid growth of the AI-driven memory consumption.

What Do Analysts Expect for SKHY Stock?

Wall Street analysts appear quite optimistic towards SKHY stock with a “Strong Buy” rating consensus and the lowest price target at $200, while the highest is $320, which puts even the lowest price target above the current trading price. The average price target is set at $245.40. Considering the recent price of $155 for SKHY, its average price target implies a potential upside of 56%. The upper price target of $320 implies significantly higher upside if the earnings of SK Hynix continue to grow and the company maintains its leading position in HBM.