SK Hynix's Stock Trades at Around 5 Times Next Year's Earnings Even After Revenue Grew 257%. Here's What a Multiple That Low Usually Signals About a Cyclical Business.

One of the more confounding aspects of investing in SK Hynix (NASDAQ: SKHY) stock is its valuation. As of the time of this writing, the stock trades at just 6 times forward earnings!

Assuming a one-time benefit is not temporarily skewing the earnings multiple lower, a forward earnings multiple that low often signals extreme negative sentiment toward the stock. That is either because of consistently poor growth or a sign that the company faces serious troubles.

None of these situations describes SK Hynix today. Instead, the company benefits from unprecedented demand for its high-bandwidth (HBM) memory chips, which has taken its revenue growth rate into the stratosphere.

In short, this objectively low forward earnings multiple is a byproduct of the cyclical nature of its business, and here's how that will probably affect SK Hynix and other memory chip stocks.

Image source: The Motley Fool.

The cyclicality of the memory chip business

Seasoned semiconductor stock investors know that cyclicality has defined the industry since the beginning. This includes Texas Instruments, which helped pioneer the chip industry in the 1950s, and even chip giants like Nvidia are not immune.

Unfortunately for SK Hynix shareholders, the memory chip industry is the most cyclical part of the semiconductor industry. That is because memory chips tend to become commoditized. Since such products offer no obvious competitive advantages, a down cycle could wipe out all the gains of a previous up cycle.

The history of Micron Technology stock, SK Hynix's U.S.-based competitor, illustrates this well. Even though Micron has outperformed the S&P 500 since its 1984 IPO, the stock actually lost value between 1995 and 2015.

How HBM has changed memory chip investing

After 2015, the rising popularity of HBM has appeared to give memory chip stocks a reprieve. Rather than becoming commoditized like other forms of memory, HBM has become a critical component in the advancement of AI. Only Samsung, Micron, and SK Hynix make HBM, and the relative lack of competition has led to supply constraints.

That problem worsened after the so-called "ChatGPT moment" in 2022. This was especially true of SK Hynix, which supplies more than half of the world's HBM memory, according to Counterpoint Research. Amid its 58% market share, revenue in the second quarter of 2026 rose by 257% yearly, while its net income is up 1,242% to nearly 94 trillion won ($66 billion).

Demand is so high that some investors seem to have adopted the dreaded "it's different this time" attitude, particularly with Micron stock rising 670% over the previous 12 months. SK Hynix has only traded on U.S. markets since July, though its stock in South Korea increased by about 495%, confirming the industry growth trend.

Still, the bad news is that this time it likely won't end up being different. History shows that cyclicality will most likely reappear when supply catches up to demand. That's likely to slow and eventually reverse much of the growth, which will likely devastate SK Hynix's stock and that of its competitors.

For example, if such a move reduced net income by 90%, the forward P/E ratio of 6 would suddenly become a 60 forward earnings multiple if the stock price stayed the same. That concern is probably why investors have not bid the stock price higher.

SK Hynix and its forward P/E ratio

Ultimately, worries about the likely future down cycle in memory prices have kept SK Hynix's valuation low.

Indeed, the company has benefited from massive revenue growth, unprecedented demand for HBM, and a high market share. Even though SK Hynix has not traded on U.S. markets for very long, its ticker in South Korea likely responded to its financial growth.

Nonetheless, history says that investors should expect an eventual down cycle in memory chip prices. Although demand for memory chips shows no signs of slowing, investors should expect the legacy of past industry cycles to remain a headwind for SK Hynix stock.

Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Micron Technology, Nvidia, and Texas Instruments. The Motley Fool has a disclosure policy.