SK Hynix's Q2 profits surged sixfold but still "fell short of expectations," reaching long-term agreements with 10 customers, and HBM4 will accelerate volume production in the second half of the year

Author: Bao Yilong

SK Hynix's operating profit in the second quarter reached a record high, but still fell short of analysts' expectations, deepening market concerns about whether demand for AI chips can continue to support high valuations.

On July 28, after U.S. stock market hours, SK Hynix announced its second-quarter financial report, with operating profit soaring 557% year-on-year to 60.5 trillion won, and revenue increasing 257% to 79.3 trillion won, both setting quarterly records.

However, these figures were both below analysts' expectations. The market had previously predicted operating profit of about 64.2 trillion won and revenue of about 83.9 trillion won.

Regarding demand outlook, SK Hynix maintains an optimistic judgment. SK Hynix stated that it has finalized long-term agreements with about 10 customers and continues to negotiate with other major industry clients to enhance operational efficiency, strengthen medium- to long-term business stability, and establish a foundation for sustainable growth.

Since June of this year, SK Hynix has seen its market value evaporate by over $500 billion, with a single-month decline erasing about 45% of its stock value at one point. After the earnings announcement, SK Hynix's ADR fell more than 5% in after-hours trading, and local Korean stocks dropped 4.5% before the market opened.

Record Profit Margins, but "High Base + High Expectations" Lead to Discrepancy

In absolute numbers, SK Hynix's second-quarter performance is almost a concentrated reflection of the super cycle in the memory industry.

In the second quarter, the company reported revenue of 79.3187 trillion won, an increase of about 257% compared to 22.232 trillion won in the same period last year, and a growth of over 50% compared to 52.5763 trillion won in the first quarter. Operating profit reached 60.5426 trillion won, up 557% from 9.2129 trillion won year-on-year, and increased by about 61% from 37.6103 trillion won in the first quarter.

Profitability is even more exaggerated. The operating profit margin in the second quarter reached 76.3%, higher than 71.5% in the first quarter.

Data shows that the company's gross profit margin in the second quarter reached 83%. This means that the prices and demand for high-value-added products such as AI server memory, HBM, and eSSD have pushed SK Hynix to extremely high profit levels.

Net profit reached 93.9226 trillion won, with a net profit margin of 118%. However, this figure does not come entirely from core business operations but is significantly driven by one-time investment gains.

In the second quarter, the company recognized non-operating income of 62.166 trillion won from the partial sale of Kioxia shares, bringing pre-tax profit to 122.7084 trillion won. This led to a substantial year-on-year increase in net profit, but its sustainability is weaker than that of operating profit.

Why Did Performance Fall Short of Expectations

SK Hynix's failure to meet market expectations this time primarily stems from three structural factors.

First, the high proportion of HBM (High Bandwidth Memory) sales has limited profit growth potential. The main driver of the significant profit increase in the semiconductor industry currently comes from the soaring prices of traditional general-purpose memory, while SK Hynix's higher exposure to HBM means it benefits relatively less.

Second, the price increase of memory has significantly slowed in the second quarter. According to SK Hynix, the quarter-on-quarter price increase for general DRAM was about 30%, and for NAND flash, it was in the mid-range of 50% to 60%, both lower than the first quarter's increases of about 60% for DRAM and about 70% for NAND.

Third, long-term supply agreements (LTA) signed with major customers have locked in sales prices, weakening the profit elasticity brought by rising spot prices.

Reports citing informed sources indicate that sales locked in through long-term agreements account for about 50% of the total. The company stated that it has completed long-term contract negotiations with about 10 customers and received additional supply demand from several large tech companies.

Josh Gilbert, Chief Analyst for Etoro Asia-Pacific and the Middle East, pointed out: When you are the dominant supplier of high-bandwidth memory driving Nvidia chips, the AI boom will directly reflect on your profit statement. This means the market is unlikely to focus solely on the top-line numbers; the more critical question is whether profit margins and performance guidance can support recent stock price performance.

HBM4 Has Started Mass Production, Entering a Growth Phase in the Second Half

AI memory remains the most important growth line for SK Hynix.

The company stated that HBM4 has reached the operational speeds required by customers and possesses industry-leading energy efficiency and cost competitiveness, with large-scale shipments starting in the second quarter and further production expansion planned for the second half.

The next-generation HBM4E has also completed sample deliveries to major customers in the first half of the year, with the company claiming to have adopted the optimal process that balances technological maturity and mass production stability.

This is significant for SK Hynix. HBM4 will be an important supporting memory for the next stage of AI accelerator platforms, and the market generally expects that the mass production of Nvidia's next-generation AI accelerator platform will become a significant catalyst for HBM4 demand in the second half.

As a core supplier to Nvidia, SK Hynix's ability to deliver HBM4 stably will directly impact its leading position in the AI memory market.

NAND and eSSD Continue to Benefit, Accelerated Migration to Advanced Processes

In addition to HBM, the NAND business is also benefiting from the recovery cycle.

The company stated that it is accelerating the transition to advanced process nodes in NAND to strengthen its high-capacity, high-performance product portfolio. 321-layer products have become the highest proportion of total output, and the company plans to expand this to about 50% of domestic capacity in South Korea by the end of the year.

Enterprise-grade SSDs remain an important incremental growth area. AI data centers not only require HBM and server DRAM but also need large-scale, high-performance, and highly reliable storage devices. As cloud vendors and large tech companies expand their AI clusters, the demand for eSSD has simultaneously strengthened, helping SK Hynix improve the quality of its NAND product portfolio.

This is also a distinguishing feature of the current memory cycle compared to the past: previous memory upcycles were often driven by consumer electronics such as smartphones and PCs, while current AI server demand simultaneously drives DRAM, HBM, and eSSD, making supply and demand tight in a more structural way.

Cash Surged, Debt Decreased, but Capital Expenditures Must Continue to Rise

In terms of financial condition, SK Hynix's cash flow improved significantly in the second quarter.

As of the end of the second quarter, the company's cash and cash equivalents reached 88 trillion won, an increase of 33.6 trillion won from the previous quarter; total debt decreased by 0.7 trillion won to 18.6 trillion won, and net cash position expanded to 69.4 trillion won.

The company stated that thanks to record profits and cash generation capabilities, financial flexibility has significantly improved.

However, strong demand also means greater pressure for capital expenditures. SK Hynix expects capital expenditures to reach the upper end of the range of 40 trillion to 50 trillion won by 2026. The company is accelerating the mass production progress of M15X and is preparing to rapidly expand capacity after the cleanroom of Yongin Phase I is put into operation in early 2027.

Additionally, the company mentioned medium- to long-term investment plans for advanced packaging facilities P&T7, M17 NAND production bases, and new semiconductor clusters.

These projects will be advanced in phases based on customer demand and investment efficiency. For investors, the key question will be whether SK Hynix can maintain capital expenditure discipline while AI demand remains high and avoid excessive supply expansion that could erode profit margins in the next phase.