Markets pricing in cycle fears ahead of earnings peak

AI demand, supply constraints and long-term contracts signal structural shift

Memory supply shortage seen lasting through 2030

Analysts say sector deserves re-rating beyond cyclical status

[Getty Images Bank]
[Getty Images Bank]

Samsung Electronics and SK hynix are seeing their share prices slide even as both companies post record-breaking earnings.

The stocks have swung sharply lower each time concerns resurface about a peak in AI demand. Analysts say the market's wariness reflects the memory chip sector's well-established reputation as a cyclical industry — investors are bracing for the next downturn even in the middle of an unprecedented boom.

Samsung Electronics closed Friday down 3.02 percent from the previous session at 225,000 won ($169). SK hynix fell 7.08 percent to 1.42 million won on the same day.

Both stocks have been in a steep correction since the second half of this year. From their June peaks, Samsung and SK hynix have fallen roughly 40 percent and more than 50 percent, respectively, with price-to-earnings ratios compressing to around three times earnings.

The selloff stands in stark contrast to the companies' financial performance. Samsung Electronics posted operating profit of 107.4 trillion won through the third quarter of this year, becoming the first Korean company to surpass 100 trillion won in quarterly operating profit. SK hynix reported third-quarter operating profit of around 83.3 trillion won, achieving a record operating margin of 80 percent.

Yet the market is less focused on current results than on the prospect of future earnings erosion. Toss Securities recently published a research note titled "This is Korea" examining shifts in the domestic memory chip industry, identifying the "lag between supply and demand" as the fundamental reason peak-out fears recur at every boom.

Because building a memory fab requires tens of trillions of won and two to three years of lead time, simultaneous capacity expansions during boom periods have historically triggered oversupply and price collapses several years later — a cycle that has repeated roughly every three to four years.

Memory chipmakers' share prices have consistently moved ahead of earnings because investors have learned to anticipate the cycle. During the 2017–2018 super cycle, for instance, Samsung Electronics' operating profit peaked in the third quarter of 2018, but the stock had already hit its high in November 2017.

SK hynix posted a then-record annual operating profit of more than 20 trillion won in 2018, yet the share price still fell more than 40 percent from its peak that year.

The same pattern played out in the 2020–2023 cycle: shares declined before earnings deteriorated meaningfully, and had already bottomed and begun recovering by the time losses were at their worst.

Toss Securities argues, however, that this cycle will look different from those of the past. Even if the cycle does not disappear entirely, the brokerage predicts the amplitude will narrow and profitability will improve across three dimensions: changes on the demand side, changes on the supply side, and changes in customer relationships.

First, the nature and source of demand have changed. In the past, consumer purchases of PCs and smartphones drove memory demand, creating sharp swings as buyers delayed device upgrades during economic downturns. Now, the scale of big-tech AI investment has become the key variable. In the AI era, the more people use AI, the more memory is needed to process it — a structural shift that makes demand grow continuously, much like electricity consumption.

Supply growth is also far slower than in previous cycles. When standard commodity DRAM dominated the market, producers could quickly ramp output in response to rising prices. High-bandwidth memory, or HBM, by contrast, requires not only factory floor space but also stacking equipment, advanced packaging capabilities and rigorous customer quality certification — making it difficult to scale up supply quickly.

Customer relationships and contract structures have also evolved. In the commodity-product era, customers set volumes on a quarterly or annual basis and cut orders immediately when prices turned. HBM, however, is a customized product developed jointly with customers from the earliest design stages, making it costly to switch to a rival supplier. Long-term supply agreements spanning three to five years have become increasingly common, with provisions for advance payments, penalties for contract breaches and minimum-price floors to guard against sudden price drops — all of which have strengthened contractual ties.

"In the past, the market assigned low PER multiples because it assumed the outsized profits of a boom would not last," said Lee Young-gon, head of research at Toss Securities. "But if AI-driven structural demand growth means companies can sustain substantial earnings even through a downturn, the story changes. If earnings volatility falls and durability rises, the market can assign higher PER multiples to memory companies than it did before — which would mean the memory industry is re-rated from a simple cyclical sector to a structurally growing one."

Ultimately, the key question for this cycle is not how much profit the companies can generate at the peak, but how much earnings resilience they can preserve when the next downturn arrives.

Other brokerages also broadly agree that Samsung Electronics and SK hynix are trading at a significant discount to fair value. Kim Young-geon, an analyst at Mirae Asset Securities, said Samsung Electronics has signed long-term supply agreements with 10 major customers and is in negotiations with 10 more, adding that the company's target of locking in contracts covering 60 to 70 percent of capacity through 2030 is becoming increasingly achievable.

Kim Un-ho, an analyst at IBK Investment Securities, said memory chipmakers that previously cited a supply shortage lasting through 2028 are now uniformly saying the shortage will persist through 2030. "Memory demand has entered a long-term growth phase, and the current share price is excessively undervalued relative to earnings," Kim said.


jiyun@heraldcorp.com