SK Hynix: The Memory Supercycle Still Has Legs

The memory market has been on fire, and arguably the top company in the field just made its U.S. debut when Korean company SK Hynix (NASDAQ: SKHY) listed its ADRs (American Depositary Receipts) on the Nasdaq. With the memory market looking supply-constrained over the next several years, I'd be a buyer of the stock.

The leader in HBM

Among the big three DRAM makers, which also include Samsung and Micron, SK Hynix is arguably the top one to own. It was the first company to develop high-bandwidth memory (HBM), and as such, it is expected to control more than half the market for this sought-after memory, packaged with graphics processing units (GPUs) and other AI chips to help optimize their performance.

The company has a multiyear HBM partnership with Nvidia and is its main partner in the space. That's a great place to be positioned.

Approximately 78% of its revenue came from DRAM last quarter, with most of the rest from NAND (flash) memory. While a leader in HBM, the bulk of its revenue still comes from ordinary DRAM. However, with demand for all memory surging, DRAM prices have soared, which has led to SK Hynix's revenue surging and gross margins expanding. In Q1, the company's revenue soared nearly 200%, while its profit nearly doubled to 400%, as gross margins rose from 57% a year ago to 79%.

Given the strong demand it is seeing, SK Hynix plans to double its wafer capacity within the next five years. Because HBM uses upwards of three times the wafer capacity of ordinary DRAM, though, that doesn't mean DRAM supply will necessarily double.

Meanwhile, the company's CEO, Kwak Noh-jung, has said that 2027 will be the worst year the industry has seen for supply shortages, and he expects the market will remain supply-constrained until at least 2030.

Image source: Getty Images.

Looking to be less cyclical

Like others in this sector, SK Hynix is riding the huge DRAM supercycle, which currently shows no signs of letting up. Demand for HBM, where it is the leader, is surging, and ASML can't supply the industry with enough extreme ultraviolet (EUV) machines for supply to catch up with demand, given the huge spending on AI infrastructure.

Moving forward, SK Hynix should benefit from increased capacity and continued high prices. It will need to ramp up its capital expenditures to increase supply, but it just raised $26.5 billion with its U.S. offering, selling 177.9 million ADRs at $149 each, and is generating strong free cash flow.

SK Hynix has smartly begun signing longer-term deals, which it and others in the space hope will reduce the industry's notorious cyclicality. With the stock trading at a forward price-to-earnings (P/E) ratio of around 7.5 times and the DRAM supercycle looking like it could last another four to five years, this AI stock looks like a buy in my opinion.

Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ASML, Micron Technology, and Nvidia. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.