Author:SoSoValueResearch

SK Hynix releases Q2 2026 results: The rise in DRAM and NAND prices, along with the expansion of AI server storage demand, drives revenue, operating profit, and profit margins to historic highs. HBM4 has begun shipping, and high-value products such as enterprise SSDs, server DRAM, and SOCAMM2 continue to ramp up in volume. The company has also completed long-term supply agreement negotiations with about 10 core customers, further increasing visibility for mid-to-long-term orders.

However, revenue and operating profit remain below the market’s most optimistic expectations. The significant increase in net profit is mainly from investment asset-related income, which does not fully reflect the profitability of the core business. The day before the earnings report was released, SK Hynix's stock fell 14.65%; after the report was released, the stock price briefly rose over 4% but turned to decline after the conference call ended, as of press time, down over 11%, indicating that long-term agreements, HBM4 mass production, and supply shortages have not fully alleviated market concerns about performance falling short of expectations, storage prices peaking, and capital expenditure expansion.

Q2 Performance: Revenue and Operating Profit Set New Records, but Below Consensus Expectations

Q2 revenue reached 79.32 trillion won, an increase of 257% year-on-year and 51% quarter-on-quarter, but below the market consensus expectation of 84.17 trillion won.

The gross profit amounted to 65.99 trillion won, growing 451% year-on-year and 58% quarter-on-quarter; the gross margin rose from 79% in Q1 to 83%.

The operating profit was 60.54 trillion won, a year-on-year increase of 557% and a quarter-on-quarter increase of 61%, below the market expectation of 64.31 trillion won; the operating margin climbed from 72% to a record 76%. EBITDA reached 64.56 trillion won, and the EBITDA margin rose to 81%.

Net profit increased 1,242% year-on-year to 93.92 trillion won, with a net profit margin of 118%, but this included 63.27 trillion won in investment asset-related income. Market analysts believe that this income is mainly related to the sale of investment interests in Kioxia. Therefore, when assessing the quality of the core business's profitability for this quarter, operating profit, gross margin, and operational cash flow are more meaningful indicators.

One of the reasons for performance being below consensus expectations is that SK Hynix has a higher proportion of HBM revenue. HBM typically uses long-term pricing and supply arrangements, and the company's profit elasticity concerning the recent rapid rise in ordinary DRAM and NAND prices is relatively limited. This means that long-term agreements enhance profitability stability, but also weaken the company’s upward elasticity during phases of sharp price increases in the spot and short-term contract markets.

Storage Prices Continue to Rise, Q3 Shipment Volume Maintains Growth

The average selling price of memory chips rose approximately 30% quarter-on-quarter in Q2, with shipment volume increasing in the high single digits quarter-on-quarter, and the price increase remains the main driver of revenue and profit margin growth this quarter. DRAM accounts for approximately 73% of product revenue, while NAND accounts for about 27%.

The company expects global DRAM demand to grow about mid-double digits 20% year-on-year in 2026, and NAND demand to grow about high double digits 10%. The upgrade in AI server architecture is driving simultaneous expansions of HBM, server DRAM, and enterprise SSDs; the proliferation of Agentic AI is also beginning to extend storage demand from model training to inference, data retrieval, and long-term storage.

For Q3, SK Hynix expects DRAM shipment volume to grow about 10% quarter-on-quarter and NAND shipment volume to grow in low single digits. The company did not provide specific quarterly revenue and operating profit guidance, so the growth rate for the second half of the year will still depend on DRAM and NAND contract prices, the ramp-up speed of HBM4, and the revenue proportion of high-value products.

On the supply side, advancements in process conversion, HBM occupying more wafers, and the longer construction cycle for new capacities continue to restrict effective supply in the industry. However, current storage prices and profit margins are at extremely high levels, and the market will closely watch whether customer pre-purchases are overspending future demand, as well as the changes in supply-demand relations after new capacities begin to release from 2027.

HBM4 Entering Mass Production Phase, HBM4E Samples Delivered Ahead of Schedule

SK Hynix has started shipping HBM4 in Q2 and plans to significantly increase production in the second half of the year. The company stated that the products meet the operational speed requirements of customers and are competitive in energy efficiency and cost.

Samples of HBM4E using 1c nanometer technology have been delivered to major customers in the first half of the year, ahead of the previously planned delivery in the second half. Early sample delivery helps the company enter customer validation and joint development processes sooner and lays the foundation for mass production in 2027.

SOCAMM2 products have also begun full supply. This product targets high-capacity, low-power memory needs for AI servers and CPU sides, complementing HBM, which primarily serves GPUs and AI accelerators. As the memory bottleneck of AI servers expands from single GPUs to entire systems, SK Hynix's growth sources are shifting from HBM to server DRAM, SOCAMM2, and enterprise SSDs.

In NAND, the 321-layer product became the highest proportion of the company's NAND output in Q1, and the company plans to increase this to approximately 50% of domestic NAND capacity in South Korea by the end of 2026. Advanced process conversion helps reduce unit costs and improve the supply capacity of high-capacity enterprise SSDs.

Long-Term Agreements Extended to About 10 Customers, Storage Cycle Begins to Show Structural Changes

SK Hynix has completed long-term supply agreement negotiations with about 10 customers, including core clients, and continues to negotiate with other major clients. This new round of long-term agreements includes pricing structures aimed at storage price fluctuations, with some contracts introducing advance payment or deposit mechanisms to enhance customer performance capabilities and support capacity investments.

The value of long-term agreements for SK Hynix is not only reflected in securing orders but also in improving the visibility of capital expenditure decisions. The storage industry has often expanded production based on short-term prices and inventory cycles, leading to oversupply and price declines. Multi-year contracts, advance payments, and joint development mechanisms can transfer some expansion risks to customers and reduce profit cycle volatility.

The corresponding cost is that when ordinary DRAM and NAND prices rise rapidly, long-term locked-price products may not fully capture the price increase benefits of the spot market. This quarter's revenue and operating profit being below the most optimistic expectations already reflects the difference between demand stability and short-term price elasticity.

Capital Expenditure Rises to 40 Trillion Won High, Cash Flow Still Provides Support

SK Hynix expects capital expenditure to reach a high range of 40 trillion won in 2026, focusing on advancing the mass production of the Cheongju M15X, advanced process conversion, HBM backend packaging, and the expansion of Yongin Fab 1 in early 2027.

Q2 operating cash flow reached 65.71 trillion won, with fixed asset acquisition expenditures of 10.67 trillion won. Calculating free cash flow for the quarter roughly by subtracting fixed asset acquisition expenditures from operating cash flow results in about 55.04 trillion won.

As of the end of Q2, the company’s cash and short-term financial assets reached 87.96 trillion won, an increase of 33.63 trillion won compared to Q1; interest-bearing debt fell to 18.59 trillion won, with net cash reaching approximately 69.37 trillion won. The debt-to-equity ratio was reduced to 7%, and the net debt-to-equity ratio was negative 26%.

Strong cash flow indicates that the company currently has the ability to simultaneously advance expansion, reduce debt, and increase shareholder returns. However, as M15X, Yongin, P&T7, and other long-term production bases expand one after another, depreciation and fixed costs will gradually increase. If AI capital expenditure growth slows, Samsung and Micron expand HBM4 supply, or Chinese memory manufacturers accelerate expansion in the ordinary DRAM and NAND markets, the currently extremely high profit margins will face downward pressure.

Conference Call: AI Demand Not Showing Signs of Slowing, Valuation Focus Shifts to Duration of Cycle

Management indicated that they have not observed significant slowing in AI investments from major customers. Large technology companies continue to expand data center construction and storage procurement due to factors such as AI service growth, inadequate existing computing power, and the higher demands that Agentic AI places on server memory and storage capacity. Improvements in model efficiency may also lower AI usage costs and expand application ranges, thereby increasing overall infrastructure demand.

The core message released during the conference call is that SK Hynix remains confident about order and supply tightness for the upcoming quarters. The ramp-up of HBM4 in the second half, early sample delivery of HBM4E, signing of long-term agreements with about 10 customers, and continued growth in Q3 DRAM and NAND shipment volumes all indicate that AI demand is still converting into actual storage orders.

This earnings report alleviates market concerns about an abrupt reversal in AI storage demand but does not fully resolve valuation discrepancies. Revenue and operating profit being below consensus expectations shows that the market had already incorporated more aggressive price and profit assumptions; a 76% operating profit margin makes investors pay closer attention to how long the profit peak can be maintained.

The next phase of SK Hynix's valuation will depend on three variables: whether HBM4 can maintain its technological and market share advantages, whether long-term agreements can convert demand visibility into stable returns, and whether capital expenditure expansion can meet customer needs while avoiding oversupply. Q2 confirms that AI storage demand remains strong, and the significant stock price volatility indicates that the market's assessment criteria have shifted from whether profits will grow to whether record profit margins can be sustained.

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