Hynix Isn't Selling Shares to Cash Out. It's Funding a $26.5 Billion Factory Bet.

Given how many times most investors have seen it before, it would be easy to assume an insider or founder is just using the market's recent strength to cash in -- by getting out -- while valuations are high.

That's not the case here, though. Every penny of SK Hynix's (NASDAQ: SKHY) recent public offering is going into the company's war chest. Much of it's already earmarked, in fact, to capitalize on an opportunity that's going to continue growing for the foreseeable future. Here's what you need to know.

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SK Hynix in the spotlight

It's possible you're regularly relying on its hardware without even realizing it. See, SK Hynix makes computer memory of all sorts, including data storage (NAND solid state drives), DRAM (your device's capacity to manage information and handle different tasks whenever it's turned on), and perhaps most notably right now, the high-bandwidth memory -- or HBM -- increasingly being used in artificial intelligence computing. Last year, the now-$1 trillion South Korean company turned $65 billion worth of revenue (up 47% year over year) into net income of nearly $29 billion. Granted, that was an unusually good year, boosted by a combination of soaring demand and limited supply, and subsequently, outstanding pricing power.

The underpinnings of this growth are still in place, though, and will be for a while. That's the ongoing proliferation of AI data centers, specifically the high-bandwidth memory they increasingly require. Rivals Micron Technology (NASDAQ: MU) and Samsung (OTC: SSNLF) also make HBM, but not at the quality and scale of SK Hynix.

SK Hynix also has the benefit of being AI market-leading Nvidia's (NASDAQ: NVDA) preferred tech partner, which regularly pairs its AI processors with SK's memory chips. That's a big reason the company controls more than half of the HBM market, according to Counterpoint Research.

Now with even more cash in hand, SK Hynix is ready to become a fiercer competitor not only in the HBM market but also in the NAND and DRAM markets.

Plenty of constructive uses of the money

It wasn't an initial public offering, for the record. A public offering? Yes. But not the company's first-ever issuance of stock in exchange for cash. SK Hynix first listed its shares in South Korea all the way back in 1996.

The recent fundraiser, rather, came from its first foray into the U.S. capital market, with American depository receipts. ADRs are simply tradable certificates representing foreign-listed tickers that would otherwise be difficult for U.S. investors to own. In this instance, every 10 shares of the U.S.-listed ADR represent one newly issued, South Korean-listed share of SK Hynix held in trust by the ADR's sponsor, Citigroup. Little else is different, though. SK Hynix received $26.5 billion in cash proceeds from American investors interested in investing in the company's growth potential.

That potential is jaw-dropping, too. Precedence Research predicts the HBM market alone is poised to grow at an average annual rate of 25% through 2035, when it will be worth nearly $70 billion per year.

And that's just high-bandwidth memory, to be clear. Mordor Intelligence expects the overall DRAM business to grow by nearly 15% per year through 2031, when it will annually be worth almost $250 billion. Most of this demand will come from artificial intelligence data centers.

So what's SK Hynix's plan for its recent $26.5 billion cash injection? Expand its capacity to meet this growing demand ... fast. It's already constructing a new foundry near Seoul, South Korea's Yongin Cluster; it's building an advanced packaging plant in Cheongju; and it intends to purchase multiple EUV (extreme ultraviolet) lithography machines used to manufacture semiconductors, just to name a few. These moves should not only maintain the company's position as one of the world's most important memory makers, but also help it remain the leading HBM name, positioning it perfectly to capitalize on the impending growth of this sliver of the AI data center infrastructure market.

Worth the inevitable volatility

Like most other AI stocks, this one has rallied since 2023 (shortly after the launch of OpenAI's ChatGPT started what would evolve into a full-blown artificial intelligence revolution), and outright soared this year; the company couldn't have picked a better time to issue new shares. Aiming its fundraising efforts at U.S. investors is savvy, given how American investors are willing to pay a premium for a compelling opportunity like this one right now.

Of course, this can -- and eventually will -- lead to a profit-taking-driven pullback. That's simply the norm for AI stocks.

Still, this stock's/ADR's current price and valuation aren't unreasonable where they stand right now, and would be outright bargains after any decent dip, especially given what awaits. Already sporting high profit margins, a recent report from DigiTimes suggests that high-bandwidth memory prices could more than double between now and 2027, yet still not quell growing demand. SK Hynix could easily outperform next year's analyst-projected earnings growth of 40%. And that's still just the beginning of what's expected to be a multiyear stretch of similar growth.

This might help convince you: The vast majority of analysts covering this stock still rate it as a strong buy, with a consensus price target that's more than 60% above its present price. That's not a bad way to start out a new trade.

Citigroup is an advertising partner of Motley Fool Money. James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Micron Technology and Nvidia. The Motley Fool has a disclosure policy.