Stock Price Plunges but UBS Stands Firm! UBS: SK Hynix's Valuation Severely Undervalued by the Market

Despite a recent dramatic correction in SK Hynix's (SKHY-US) stock price, UBS's latest research report maintains a 'buy' rating, believing that the market is overreacting to short-term risks and ignoring the structural growth in memory demand driven by AI. UBS has lowered its target price from 320 million Korean won to 300 million Korean won, but emphasizes that the valuation adjustment mainly reflects more conservative price assumptions, not a reversal in AI memory demand trends.

SK Hynix's stock price has fallen by approximately 52% from its high on June 22, but it has risen by a cumulative 115% so far this year. More notably, during the period of significant stock price correction, market expectations for the company's long-term profits have continued to be upgraded. Market consensus now expects 2027 operating profit to be 361% higher than at the beginning of the year, and UBS's own forecast has also been upgraded by 281%, resulting in a rare phenomenon of 'stock price decline and profit expectation rise'.

UBS points out that SK Hynix's estimated price-to-book ratio (P/B) for the next 12 months is only about 1.66 times, and the market implies that the company's long-term return on equity (ROE) is only 18.9%. However, UBS estimates that SK Hynix's average ROE from 2027 to 2031 can reach 40.2%, far exceeding the market pricing level.

The bank believes that investors are still evaluating SK Hynix based on the traditional memory industry cycle model, but AI has fundamentally changed the industry's supply and demand structure. From 2012 to 2022, the average ROE of the DRAM industry was approximately 17.7%, which is close to the current market-implied 18.9%. However, the AI era has brought about the synchronous growth of HBM, high-bandwidth DDR5, LPDDR5, and NAND, gradually shifting the memory industry from a cyclical growth to a structural growth.

UBS states that the market has previously generally believed that AI demand is mainly concentrated in GPUs and HBM. However, with the rapid development of agentic AI, the inference workload of data centers continues to increase. The CPU platform requires more DDR5 and LPDDR5 memory, and the large amount of KV Cache data generated by AI inference will also boost the demand for NAND flash memory. AI is comprehensively driving the entire memory market.

According to UBS's estimates, DRAM bit demand is expected to grow by 22% in 2026 and further accelerate to 36% in 2027. NAND demand is expected to grow by 20% in 2026 and increase to 23% in 2027. If HBM, DDR5, LPDDR5, and NAND all benefit from AI demand, the overall demand for the memory industry will be significantly higher.

On the supply side, UBS believes that production capacity will be a limiting factor in the next few years. It is estimated that the production capacity of the front-end process required for HBM will reach 500,000 wafers per month by the end of 2026 and further increase to 690,000 wafers by the end of 2027, with the proportion of total DRAM production capacity increasing from 25% in 2026 to 31% in 2027.

Since HBM will occupy a large amount of DRAM wafer production capacity, the effective supply of traditional DRAM will also be simultaneously limited. Therefore, the stronger the AI demand, the more likely it is to prolong the overall DRAM supply shortage. UBS believes that this is also the biggest difference between this round of memory industry cycle and the past.

In terms of HBM market competition, UBS estimates that SK Hynix will maintain its global leadership in 2026, with an HBM bit shipment market share of approximately 48%. In 2027, the market share may drop to 39%, while Samsung Electronics will rise to 41%, and Micron Technology (MU-US) will be around 20%.

However, UBS believes that even if the market share slightly declines, as long as the HBM market continues to grow at a high speed, SK Hynix can still maintain revenue and profit growth. Therefore, the change in market share does not necessarily represent a deterioration in the fundamentals.

Another point worth noting is that SK Hynix is accelerating the signing of long-term supply contracts with major customers. Currently, 10 long-term contracts have been completed, and more agreements are still under discussion. UBS speculates that the contracting parties include US hyperscale cloud service providers and major OEM manufacturers.

The bank states that although long-term contracts may limit the short-term average selling price (ASP) increase, they can lock in demand and prices in advance, improving the stability of revenue, profit, and free cash flow. For the highly cyclical memory industry, this helps to improve the overall valuation level.

This time, UBS simultaneously downgraded some profit forecasts, mainly reflecting that the DRAM price increase may not be as expected as before due to the increase in long-term contracts. Among them, the estimated quarterly increase in DRAM ASP for the third quarter of 2026 was downgraded from 21% to 19%, and the price forecasts for 2027 and 2028 were also adjusted accordingly. Therefore, the profit forecasts for 2027 and 2028 were downgraded, and the target price was lowered from 320 million Korean won to 300 million Korean won.

However, even after the adjustment, UBS's forecast for SK Hynix's 2027 operating profit is still 17% higher than the market consensus, indicating that the downgrade is for price assumptions, not the long-term growth trend of AI demand.

In terms of capital expenditure, UBS estimates that SK Hynix's capital expenditure will increase to 47 trillion Korean won in 2026, a 71% increase year-on-year; in 2027, it will increase to 62 trillion Korean won, a further 31% increase; and in 2028, it will further reach 67 trillion Korean won.

Among them, the first clean room of Yongin (Yongin) Factory 1 is scheduled to start equipment installation in February 2027, and the second clean room will also start operation in late 2027. The M17 NAND factory is planned to start production in 2029, indicating that the company is laying out AI memory demand in advance.

Free cash flow is another highlight. UBS estimates that SK Hynix's free cash flow for 2026 to 2028 will reach 188 trillion Korean won, 320 trillion Korean won, and 374 trillion Korean won respectively, and the huge cash flow is expected to support shareholder returns.

UBS estimates that the company may start a stock repurchase plan of approximately 12 trillion Korean won as early as the second half of 2026 and may update a more comprehensive shareholder return policy at the third quarter earnings call in 2026. The long-term goal is expected to use approximately 50% of free cash flow for shareholder returns, including cash dividends and treasury stock repurchases.

In terms of valuation, UBS uses a 3.65 times price-to-book ratio for the next 12 months as the evaluation basis, based on a long-term ROE of 40.2% and an equity cost assumption of 11.5%, corresponding to a target price of 300 million Korean won. Compared to the current stock price of approximately 140.1 million Korean won, UBS believes that the market is still overreacting to the risks of traditional memory industry cycles and has not fully reflected the possibility of the industry entering a new long-term profit cycle driven by AI.