What Drives the Stock of SK Hynix?
SK Hynix has recently faced a significant downturn in its stock performance. The Global Depositary Receipt (GDR) traded in Germany has plummeted by more than 13%, while the stock in South Korea has seen a decline exceeding 15%. Over the span of three to four weeks, this decline aggregates to approximately 36%.
A crucial factor contributing to this volatility is the company’s new U.S. listing. SK Hynix introduced 178 million American Depositary Receipts (ADRs) priced at $149, successfully raising over $26 billion. The initial pricing saw a rapid gain of 14%, reaching $170, but has since slipped back to around $150.
South Korean traders indicate that much of this price decline results from profit-taking and reallocations from the common stock to the newly issued U.S. securities. Additionally, the Korean Investment and Securities agency has lowered its forecast, projecting an operational profit of approximately 60 trillion Won for Q2, which is 8% below the consensus of 65 trillion Won. The reasoning behind this is attributed to weaker selling prices for High Bandwidth Memory (HBM) compared to the broader memory market.
However, this explanation lacks conviction. The prices of HBM continue to rise as manufacturers strategically shift their limited capacity towards the profitable HBM chips. Therefore, substantial profit misses remain unlikely.
The market reaction has impacted the entire semiconductor industry. Outside China, SK Hynix, Samsung, and Micron share the HBM market, usually moving in tandem. On days of sharp declines, SK Hynix tends to get hit hardest, as it is primarily a HBM-focused company, while Samsung and Micron generally experience smaller declines.
Technical Analysis
From a technical perspective, the stock may be developing a head-and-shoulders pattern. If the price were to break below the neckline, further downward movement could be anticipated. The GDR has a notable support level at approximately €1,000. If this level holds, the decline remains manageable. Conversely, if the stock rises above €1,460, the formation would be deemed a failure, opening the path for upward momentum. A failed head-and-shoulders pattern is considered one of the strongest technical indicators for bullish movement.
Martin’s Perspective
In my view, this current pricing represents a buying opportunity. The stock recently traded at a Price-to-Earnings (P/E) ratio of 27 to 28 based on the previous twelve months’ profits. Investors who price in the cyclical nature of the business are selling at these levels. However, it is crucial to focus on future earnings; when considering the anticipated profits for the next year, the P/E ratio drops to just eight. The lower the price goes, the more attractive this valuation becomes.
Investors should consider making purchases now while maintaining reserves for potentially lower prices. My baseline scenario anticipates a situation similar to what Samsung experienced: a slight revenue miss, but stronger-than-expected earnings.
In summary, while recent events have led to a turbulent ride for SK Hynix, the fundamentals underlying its business remain robust, making the current dip a potential buying opportunity. As always, investors should assess their risk tolerance and perform diligent research before making any investment decisions.
