SK Hynix (SKHY -8.98%) CEO Kwak Noh-Jung expects the memory chip shortage that has led his company to produce record profits could continue until at least 2030.
That comment may give investors the confidence to put a lot of money in the chipmaker stock with the hopes of turning it into $1 million. After all, the same trend that's pushed the stock to a nearly $1 trillion valuation over the past year or so is expected to continue for the next four years.
To turn even a sizable investment into $1 million, investors are likely banking on a repeat performance of the stock's 500% return over the past year. Here's why that's unlikely to happen.
Image source: The Motley Fool.
Is the memory market already peaking?
Despite the CEO's assertion that memory demand will remain elevated through 2030, that doesn't mean the market's disequilibrium will remain as severe as it is today. SK Hynix and peers Samsung and Micron are spending hundreds of billions of dollars to expand capacity. That includes creating space within existing facilities and building new chip fabs.
Additionally, they're buying new equipment and upgrading existing machines to increase wafer throughput. A lot of supply is expected to come to market over the next few years.
Importantly, price increases are already slowing. TrendForce estimates third-quarter DRAM pricing will climb between 13% and 18%. That's a stark slowdown from the approximately 60% price increase in the second quarter. While prices are still rising, a slowdown in momentum signals the start of an earnings peak.
How long the current earnings cycle lasts, how high it will climb, and how steep earnings will drop in the aftermath are the real questions investors need to concern themselves with. Even if demand outstrips supply through 2030, SK Hynix can still experience a collapse in earnings as revenue growth slows while costs rise faster. That's expected to occur well before 2030.
NASDAQ: SKHY
Key Data Points
Analysts currently expect earnings for SK Hynix and its peers to peak in 2027 or 2028. That's why investors are only willing to pay about 6 times the company's current earnings today.
That might be a fair price, but it cannot support another 500% increase in the stock over the next few years without an additional catalyst to drive demand even higher. And considering expectations are already very high for demand, even a slight hiccup (customers reducing inventory, competitors increasing supply faster than expected, or government interventions) could cause a collapse in earnings expectations, leading to a massive drop in the stock price.
Investors hoping for a repeat performance from SK Hynix and a path toward $1 million may want to consider other investments with more predictable upside and a clear case that the market is undervaluing the stock.
