SK Hynix Just Sent a Huge Warning to Micron Investors

Massive demand for memory chips for artificial intelligence (AI) training and inference has been a boon for the three major memory chipmakers. Shares of Micron Technology (NASDAQ: MU) have climbed over 850% in the past year, while its Korean competitors SK Hynix and Samsung Electronics are up nearly 900% and 500%, respectively, in the same period. All three have benefited from a massive supply/demand imbalance, which has allowed them to charge record-high prices for their products.

Now SK Hynix is making a move that should be a warning to Micron investors and the memory market in general. The company will list American depositary receipts on the Nasdaq stock exchange next month. The offer could raise over $29 billion. Here's why Micron investors need to pay attention.

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A massive capital raise for Micron's biggest competitor

While we're talking about trillion-dollar companies, make no mistake: $29 billion is still a huge amount of money to raise from the public market. Few other companies have ever raised that much at one time from a stock offering.

That capital has to come from somewhere. With Micron being the only one of the big three memory chipmakers with U.S.-listed shares, it may feel the brunt of the shift in capital as investors look to broaden exposure in the memory market.

The bigger thing Micron investors need to worry about, however, is exactly what SK Hynix plans to do with all that cash. In its SEC filing, management said it intends to use all proceeds to construct new production facilities in Korea and to purchase new fabrication equipment.

Those facilities could start producing new chips before the end of 2027, with a rapid ramp-up in capacity through 2030. It's also constructing an advanced chip packaging facility in Indiana that's set to open in 2028.

SK Hynix's expansion plans could rapidly increase the total supply of memory chips in a market where products are mostly commoditized. SK Hynix chips can be used in place of Micron chips. As a result, if SK Hynix has more chips to sell, it could gain market share and put pressure on pricing.

Of course, Micron isn't standing still. It's building two factories in Idaho, which are set to open in 2027 and 2028. It also acquired a site in Taiwan where it expects to start production in mid-2027, and it's planning additional projects set to start production later this decade. Overall, management expects supply constraints to persist through the end of next year.

As more supply comes online to meet demand, prices will fall. Overall profits can continue to climb for some time, as more unit sales offset declining market prices. However, profits will eventually fall as supply growth outpaces demand growth, with SK Hynix, Micron, and Samsung all racing to build capacity. SK Hynix's capital raise could accelerate that peak.

Micron investors should exercise caution

The current upward earnings cycle in the memory chip market can't last forever. Micron is already taking steps to protect itself against what could be a severe downcycle in a few years. It's signing long-term strategic customer agreements that lock in pricing at a maximum equal to its current price, while also creating a pricing floor.

Many of those agreements run through 2030, and management says they represent about 20% of its dynamic random-access memory (DRAM) chip volume. The agreements could reduce the cyclical downturn later this decade, but it also caps the upside it could generate over the next year or two from increased pricing.

With SK Hynix's aggressive build-out plans about to receive significant capital backing, Micron may be betting on an accelerated timeline toward the market's peak pricing.

The stock price has climbed to about 9 times forward earnings expectations and 8 times fiscal 2028 earnings expectations. If Micron's earnings cycle peaks, as expected, in 2028, it's currently trading for a relatively expensive multiple compared to its historic valuation. If the competition pushes that timeline forward or worsens the downcycle, it could prove way overvalued at today's price.

Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Micron Technology. The Motley Fool has a disclosure policy.