Meet SK Hynix, the Key Nvidia AI Partner That's Delivering Triple-Digit Growth and Just Launched on the Nasdaq. Is the Stock a Buy?

Investors have flocked to artificial intelligence (AI) stocks in recent years to bet on the next game-changing technology -- and some of the first winners have been companies providing products and services essential to the functioning of AI. U.S. investors have had access to many of these players, from AI chip leader Nvidia to memory giant Micron Technology, as they trade in the U.S. on the Nasdaq.

And now, since July 10, U.S. investors also have easy access to SK Hynix, a South Korean company that's playing a major role in the AI revolution. This key Nvidia partner has been delivering triple-digit growth, and it just launched American depositary receipts (ADRs) on the Nasdaq. The shares advanced 13% during their first day of trading and closed at just over $168. Is SK Hynix a buy? Let's find out.

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A leader in memory for AI

SK Hynix is South Korea's second-biggest company after Samsung, and it's seen earnings soar amid the AI boom. The company makes a variety of memory types that serve many devices you probably use daily -- such as smartphones and computers -- and are used across industries too. But where SK Hynix has truly stood out in recent times is in the area of high-bandwidth memory (HBM), which involves a stacking of memory close to a processor. HBM is in high demand from AI customers, and this has supercharged SK Hynix's growth.

In the recent quarter, for example, the company reported revenue growth of 198% to about $35 billion dollars, a record level. Net income soared 398%, and operating margin came in at 72%.

Of course, SK Hynix isn't alone in this market, as it faces competition from other memory providers such as Micron and Sandisk, and business has been booming for all of these players. But SK Hynix has secured leadership in the key market of HBM, and this is significant considering the need for this type of memory in AI. SK Hynix held 58% share globally of the HBM market as of the end of the first quarter, according to Counterpoint Research.

SK Hynix and Nvidia

Another significant point is that SK Hynix is Nvidia's main memory partner, and considering Nvidia's dominance in the AI chip market, this is a big reason to be optimistic about SK Hynix's prospects. The two companies even reinforced their relationship recently, signing a multi-year technology partnership. It involves SK Hynix supplying memory across a broad range of areas, from AI infrastructure to personal AI and robotics.

"SK Hynix has been Nvidia's largest memory partner and will continue to be our largest memory partner," Nvidia chief Jensen Huang said at the time.

Finally, SK Hynix trades at a discount compared to the industry and rival Micron. Prior to the ADR debut, SK Hynix traded at 4.8x 12-month forward earnings estimates, according to a CNBC report citing LSEG data. The industry median is 29.84x, and Micron's is 6.6x, the data showed.

Soaring demand

Now, let's return to our question: Should you buy SK Hynix ADRs? Demand in the memory market is soaring thanks to the AI boom -- in fact, demand is so high that these companies don't have to worry much about rivals. There is enough need for memory to support enormous growth among leading memory players.

And the points I mentioned above make SK Hynix a compelling choice. But it's important to keep in mind that the memory market is known for being cyclical, with periods of intense demand followed by declines. The major question is whether this AI boom will be different, for example, leading to a much longer phase of growth than in past cycles, or less of a drop in demand in the later stages of the cycle.

This uncertainty means you should let your risk tolerance guide you. If you're a cautious investor and you're worried about the cyclical nature of this market, you may want to watch SK Hynix from the sidelines. But if you're a growth investor interested in diversifying across AI players, you might consider scooping up a few shares of SK Hynix at today's levels, as they may have room to run, particularly over time.

Adria Cimino 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.