Why SK Hynix Plunged in October

Shares of South Korean memory giant SK Hynix (NASDAQ:SKHY) fell 20.2% in October, according to data from S&P Global Market Intelligence.

While SK Hynix actually reported strong numbers at the end of the month, this wasn't enough to offset the big downturn in AI stocks, especially semiconductor stocks related to the AI build-out.

Blowout earnings weren't enough to claw back October's losses

SK Hynix tends to be highly volatile within the already volatile semiconductor sector. October was an especially bad month, with virtually all AI stocks selling off violently in the first part of the month.

This was due to several factors. The first, and likely most prominent, factor was the leaked third-quarter revenue number from the leading AI lab Anthropic ahead of its IPO. Although the leaked $16 billion-plus revenue figure represented staggering growth over the prior year, investors might have hoped for more, given numbers that had already leaked in August.

The thinking goes that if Anthropic or its competitors don't make enough revenue, they won't be able to cover their large computing commitments, which could slow the AI build-out.

Add in the uncertainty over the midterm elections, especially state-level races in states where many data centers are being built, as well as rumors that the U.S. may renew military operations in Iran after the midterms, and artificial intelligence stocks saw an across-the-board sell-off to start the month.

The sell-off occurred even in stocks of companies that are doing well. That includes SK Hynix, which posted eye-popping results later in the month. Even so, it wasn't enough to claw back the big decline earlier in October.

In the third quarter, SK Hynix saw revenue skyrocket 328% to 104.6 trillion Korean Won, while earnings per share rallied 205% to 54,454.00 Korean Won per share. However, operating profit grew much more, by 632%. Operating margin came in at a whopping 80%.

SK Hynix is leading the AI memory boom, driving an unprecedented up cycle. In fact, SK Hynix only trades at 3.5 times its 2027 earnings estimate. That's stunningly cheap. Additionally, management will pay a large dividend of 20,000 Won per share to shareholders at the end of this year. That's a 1.5% dividend yield at current stock levels.

However, it appears the sustainability of those earnings is being closely scrutinized. Given how much revenue and earnings have accelerated this year, factors such as the AI build-out's financing availability, the anti-data-center sentiment in the U.S., and the aforementioned concern over AI lab revenue are all contributing to concerns over how long the boom can last.

Image source: The Motley Fool.

Whom are you going to believe?

If SK Hynix can just maintain its current level of earnings power, the stock is now remarkably cheap. However, one could say the same about many AI-related stocks right now.

The fate of these stocks depends on what happens with the data center build-out, not during this earnings season, but in 2028 and beyond. Therefore, investors won't know the answer to their SK bet for some time.

Billy Duberstein and/or his clients have positions in SK Hynix. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.