Memory chip trio on a roll, but analysts warn against over-relying on long-term contracts

Big Tech's AI investment drives sustained growth for the three memory chipmakers

Rising external financing by Big Tech raises concerns about sector stability

Memory demand increasingly sensitive to financial market conditions

Korea Ratings warns LTAs cannot eliminate customer credit and funding risks

Slowdown in Big Tech investment pace could dampen memory demand

A construction site at the general industrial complex of the semiconductor cluster SK hynix is building in Yongin, Gyeonggi Province. [Herald DB]

As surging AI demand extends a memory chip supercycle, analysts are warning that Big Tech customers' growing reliance on external financing could become a drag on the sector's fortunes.

The three major memory chipmakers have secured stable demand by signing long-term supply agreements of at least five years with key customers, but analysts cautioned that the possibility of renegotiation should not be overlooked if memory demand eventually slows.

According to Bloomberg and industry sources, the combined annual operating profit of Samsung Electronics, SK hynix (January–December) and Micron (fiscal year September–August) is forecast to grow exponentially — from 105 trillion won ($78.5 billion) in 2025 to 795 trillion won in 2026 and 1,284 trillion won in 2027.

Big Tech companies have continued to pour money into large-scale data centers in line with expanding demand for AI services, putting the three memory chipmakers in an era of unprecedented rapid growth.

Analysts, however, say the rising share of external financing among Big Tech firms warrants close attention. Should those companies scale back their investment pace in response to financial market conditions, the memory sector could feel the impact.

Kim Jeong-hun, a senior analyst in the corporate ratings division at Korea Ratings, said at a Korea Ratings credit seminar on Thursday that about 50 percent of the estimated $2.9 trillion in AI capital expenditure planned for 2025 to 2028 is expected to be funded externally. "This makes the sector increasingly sensitive to financial market conditions — including interest rates, capital market liquidity and investor risk appetite," he said.

As a result, analysts expect the memory market's fortunes to be shaped not only by actual supply and demand dynamics but also by customers' creditworthiness and financing structures, making the sector far more exposed to broader financial market conditions.

Workers load Samsung Electronics and SK hynix semiconductors bound for export onto an aircraft at the Korean Air cargo terminal at Incheon International Airport on July 30. Airport Photographers Pool

The memory market has long been plagued by volatility, with conditions rising and falling in step with consumer product demand from smartphones and PCs.

More recently, however, as AI demand has intensified a supply crunch, Samsung Electronics, SK hynix and Micron have moved to reduce that volatility and improve business stability by locking in long-term supply agreements, or LTAs, of five years or more.

Samsung Electronics said at its second-quarter conference call in July that it was negotiating LTAs "with customers that can accept confirmed future demand and a high degree of mutual commitment to contract fulfillment," adding that it had already concluded agreements with its top five global data center customers.

SK hynix said it had "enhanced the visibility and reliability of customers' medium- to long-term demand plans by incorporating financial mechanisms to support contract fulfillment, such as deposits," and that it was "discussing various approaches with customers to manage price volatility."

Micron has been expanding what it calls strategic customer agreements — arrangements similar in nature to LTAs — under which it supplies memory over five years and collects advance payments. The company has emphasized that customers are contractually obligated to pay even if they do not purchase the committed volume.

Kim, however, cautioned that "long-term supply agreements improve short-term visibility on volume and pricing, but they do not eliminate customer credit risk or financing risk."

Should actual memory demand fall short of contracted volumes, inventory could pile up and the scale of any market correction could widen, analysts warned.

"In an environment where reliance on external funding is rising, if a customer's creditworthiness deteriorates or capital market conditions tighten and financing becomes difficult, it would be hard to rule out the possibility of renegotiating the terms of long-term supply agreements," Kim said.

He added that "ultimately, long-term supply agreements are not a mechanism that eliminates cycles — they moderate short-term volatility and shift the path and timing of risk," stressing that financial buffers are critical to the credit standing of memory chipmakers.

joze@heraldcorp.com