SK hynix posted record operating profit for the second quarter, but the results still missed analysts' expectations, deepening concerns over whether the sustained demand for AI chips can support its elevated valuation.

On July 28, after the US market close, SK hynix reported its second-quarter earnings. Operating profit surged 557% year-on-year to 60.5 trillion Korean won, while revenue jumped 257% to 79.3 trillion Korean won, both setting new quarterly records.

However, these figures fell short of analyst projections. The market had anticipated operating profit of approximately 64.2 trillion Korean won and revenue of around 83.9 trillion Korean won.

Regarding demand outlook, SK hynix maintained an optimistic stance. The company stated it has finalized long-term agreements with about ten clients and continues negotiations with other major industry customers to enhance operational efficiency and strengthen medium-to-long-term business stability and sustainable growth.

The timing of the earnings release is notably sensitive. Since June, SK hynix has seen its market capitalization erode by over 500 billion US dollars, with its deepest monthly decline once wiping out approximately 45% of its stock value.

Following the earnings announcement, SK hynix's American Depositary Receipts fell more than 5% in after-hours trading, while its domestic shares in South Korea dropped 4.5% before the market opened.

Profit Margins Reach Historic Levels, But High Base and High Expectations Create a Gap

From an absolute standpoint, SK hynix's second quarter nearly epitomized a super-cycle in the memory industry.

In the second quarter, the company's revenue hit 79.3187 trillion Korean won, an increase of approximately 257% from 22.232 trillion Korean won in the same period last year and a rise of over 50% from 52.5763 trillion Korean won in the first quarter. Operating profit reached 60.5426 trillion Korean won, soaring 557% from 9.2129 trillion Korean won a year ago and climbing about 61% from 37.6103 trillion Korean won in the prior quarter.

The profitability metrics were even more striking. The operating profit margin for the second quarter stood at 76.3%, up from 71.5% in the first quarter.

Data indicates the company's gross profit margin for the quarter reached 83%. This implies that the pricing and demand for high-value-added products, such as AI server memory, HBM, and eSSD, have propelled SK hynix to an extremely high profit level.

Net profit reached 93.9226 trillion Korean won, translating to a net margin of 118%. However, this figure is not entirely derived from core operations, as it was significantly boosted by a one-time investment gain.

The company recorded a non-operating gain of 62.166 trillion Korean won from a partial sale of Kioxia equity, bringing pre-tax profit to 122.7084 trillion Korean won. This resulted in a substantial year-on-year increase in net profit, though its sustainability is weaker than that of operating profit.

Reasons for Missing Market Expectations

SK hynix's failure to meet market expectations this quarter is primarily attributed to three structural factors.

First, the high proportion of HBM (High Bandwidth Memory) sales limited the scope for profit growth. The significant boost in the semiconductor industry's profits is currently driven by the surge in prices of traditional general-purpose memory. SK hynix's relatively higher exposure to HBM means it benefits less from this specific price surge.

Second, the pace of memory price increases notably slowed in the second quarter. According to SK hynix, general-purpose DRAM prices rose approximately 30% quarter-on-quarter, while NAND flash prices increased in the mid-range of 50% to 60%. These figures were lower than the first quarter's price hikes of about 60% for DRAM and 70% for NAND.

Third, long-term supply agreements (LTAs) signed with major clients locked in selling prices, diminishing the earnings elasticity from spot price increases.

According to reports citing insiders, sales locked in through long-term agreements account for about 50% of SK hynix's total. The company stated it has completed long-term contract negotiations with around ten clients and secured additional supply demand from several large tech companies.

Josh Gilbert, Chief Analyst for the Asia-Pacific and Middle East at Etoro, noted:

"When you are the dominant supplier of the high-bandwidth memory that powers Nvidia's chips, the AI boom will be directly reflected in your profit and loss statement. This means the market is less likely to focus solely on the top-line figures. The more critical question is whether profit margins and guidance can support its recent stock price performance."

HBM4 Mass Production and Shipment Underway, Volume Ramp Expected in the Second Half

AI memory remains the most important growth driver for SK hynix.

The company stated that HBM4 has achieved the operating speeds required by customers, boasting industry-leading energy efficiency and cost competitiveness. Mass shipment commenced in the second quarter, and production volume will be further expanded in the second half of the year.

The next-generation HBM4E has also completed sampling with major clients in the first half of the year. The company claims it uses an optimal process balancing technological maturity and mass production stability.

This is significant for SK hynix. HBM4 will be a crucial companion memory for the next phase of AI accelerator platforms. The market widely anticipates that the ramp-up of Nvidia's next-generation AI accelerator platform will be a key catalyst for HBM4 demand in the second half of the year.

As a core supplier to Nvidia, SK hynix's ability to stably deliver HBM4 will directly impact its leading position in the AI memory market.

NAND and eSSD Continue to Benefit, Advanced Process Migration Accelerates

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

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

Enterprise-grade SSDs remain a significant growth driver. AI data centers require not only HBM and server DRAM but also large-scale, high-performance, highly reliable storage devices. As cloud vendors and large tech companies expand their AI clusters, eSSD demand is concurrently strengthening, helping SK hynix improve the quality of its NAND product mix.

This is another way the current memory cycle differs from the past: previous upcycles were often driven by consumer electronics like smartphones and PCs. In contrast, current AI server demand simultaneously drives DRAM, HBM, and eSSD, making the supply-demand imbalance more structural.

Cash Surges, Debt Declines, But Capital Expenditures Set to Rise Further

On the financial front, SK hynix's cash flow significantly improved in the second quarter.

As of the end of the second quarter, the company's cash and cash equivalents reached 88 trillion Korean won, an increase of 33.6 trillion Korean won from the previous quarter. Total debt decreased by 0.7 trillion Korean won to 18.6 trillion Korean won, expanding its net cash position to 69.4 trillion Korean won. The company stated that its financial flexibility has been significantly enhanced, thanks to record profits and cash generation capabilities.

However, strong demand also implies greater capital expenditure pressure. Materials indicate that SK hynix expects capital expenditure in 2026 to reach the high end of the 40 to 50 trillion Korean won range. The company is accelerating the mass production timeline for M15X and is preparing to rapidly expand capacity following the clean room commencement at the Yongin Phase 1 facility in early 2027.

Additionally, the company mentioned medium-to-long-term investment plans, including the P&T7 advanced packaging facility, the M17 NAND production base, and a new semiconductor cluster. These projects will be executed in phases based on customer demand and investment efficiency. For investors, the key question will be: while AI demand remains robust, can SK hynix maintain capital expenditure discipline and avoid overly rapid supply expansion that could erode future profit margins?