Author: Bao Yilong

SK Hynix's operating profit in the second quarter reached an all-time high, but still fell short of analysts' expectations, deepening market concerns about whether demand for AI chips can continuously support high valuations.

On July 28, after the U.S. stock market closed, SK Hynix announced its second-quarter financial report, with operating profit skyrocketing 557% year-on-year to 60.5 trillion won, and revenue increasing 257% to 79.3 trillion won, both setting quarterly records.

However, both figures fell short of analysts' forecasts. The market had previously predicted operating profits of around 64.2 trillion won and revenues of approximately 83.9 trillion won.

Regarding demand outlook, SK Hynix maintained an optimistic judgment. SK Hynix stated that it has finalized long-term agreements with about 10 clients and continues negotiations with other major industry clients to improve operational efficiency, enhance mid-to-long-term business stability, and establish a sustainable growth foundation.

Since June this year, SK Hynix has lost over $500 billion in market value, with a single month decline erasing about 45% of stock value at one point. After the performance announcement, SK Hynix ADR fell over 5% in after-hours trading, while domestic stocks in Korea dropped 4.5% before the market opened.

From an absolute number perspective, SK Hynix's second-quarter results are almost a concentrated reflection of the super cycle in the memory industry.

In the second quarter, the company reported revenue of 79.3187 trillion won, an increase of approximately 257% from 22.232 trillion won in the same period last year, and over 50% from 52.5763 trillion won in the first quarter. Operating profit reached 60.5426 trillion won, up 557% from 9.2129 trillion won year-on-year, and approximately 61% from 37.6103 trillion won in the first quarter.

Profitability is even more exaggerated. The operating profit margin in the second quarter reached 76.3%, higher than 71.5% in the first quarter.

Data shows that the company's gross profit margin in the second quarter reached 83%. This indicates that the prices and demand for high-value-added products such as AI server memory, HBM, and eSSD have pushed SK Hynix to extremely high profit levels.

Net profit reached 93.9226 trillion won, with a net profit margin of 118%. However, this figure does not entirely come from main business operations and is significantly boosted by one-time investment gains.

In the second quarter, the company confirmed non-operating gains of 62.166 trillion won from the partial sale of its Kioxia stake, with pre-tax profits reaching 122.7084 trillion won. This significantly drove net profit growth year-on-year, but its sustainability is weaker than that of operating profit.

SK Hynix's failure to meet market expectations this time mainly stems from three structural factors.

First, the high sales proportion of HBM (High Bandwidth Memory) instead limited profit growth potential. Currently, the main driver of significant profit increases in the semiconductor industry comes from soaring prices of traditional commodity memory, while SK Hynix's high exposure to HBM means its benefits are relatively limited.

Second, the price increase of memory has significantly slowed in the second quarter. According to disclosures from SK Hynix, the month-on-month price increase for general DRAM in the second quarter was about 30%, while NAND flash was in the mid-range of 50% to 60%, all lower than the increases of about 60% for DRAM and approximately 70% for NAND in the first quarter.

Third, long-term supply agreements (LTA) signed with major clients have locked in sales prices, weakening the profit elasticity brought about by rising spot prices.

Reports citing informed sources reveal that sales locked in through long-term agreements account for about 50% of the total. The company stated that it has currently completed long-term contract negotiations with about 10 clients and received additional supply demand from several large tech companies.

Josh Gilbert, Chief Analyst for Etoro Asia Pacific and Middle East, pointed out:

When you are the leading supplier of high-bandwidth memory driving NVIDIA chips, the AI boom will directly reflect in your profit margins. This means the market is unlikely to focus solely on top-line numbers; the critical question is whether profit margins and performance guidance can support its recent stock price performance.

Aside from HBM, the NAND business is also benefiting from the recovery cycle.

The company stated that it is accelerating the transition to advanced process nodes in NAND to strengthen its high-capacity, high-performance product portfolio. 321-layer products have become the highest proportion of total output, and the company plans to expand this to approximately 50% of local production capacity in South Korea by the end of the year.

Enterprise-grade SSDs remain an important increment. AI data centers require not only HBM and server DRAM but also large-scale, high-performance, high-reliability storage devices. With cloud vendors and large tech companies expanding AI clusters, eSSD demand has simultaneously strengthened, helping SK Hynix improve the quality of its NAND product portfolio.

This differs from past memory cycles: previously, the memory upcycle was often driven by consumer electronics such as smartphones and PCs, while current AI server demand is pulling DRAM, HBM, and eSSD simultaneously, making supply-demand tightness more structural.

In terms of financial conditions, SK Hynix's cash flow significantly improved in the second quarter.

By the end of the second quarter, the company's cash and cash equivalents reached 88 trillion won, an increase of 33.6 trillion won from the previous quarter; total debt decreased by 0.7 trillion won to 18.6 trillion won, and net cash position expanded to 69.4 trillion won.

The company stated that financial flexibility has significantly increased due to record profits and cash generation capabilities.

However, strong demand also means greater capital expenditure pressure. SK Hynix expects capital expenditures to reach the upper range of 40 trillion to 50 trillion won by 2026. The company is accelerating the mass production progress of M15X and is preparing to rapidly expand capacity after the commissioning of the Longjing Phase 1 cleanroom in early 2027.

Additionally, the company mentioned mid-to-long-term investment plans such as P&T7 advanced packaging facilities, M17 NAND production base, and a new semiconductor cluster.

These projects will be advanced in phases based on customer demand and investment efficiency. For investors, the key question will be whether, while sustaining high AI demand, SK Hynix can maintain capital expenditure discipline and avoid supply expansions that would erode next-stage profit margins.