As the share prices of Samsung Electronics and SK hynix continue a record-setting rally, optimism and caution are running neck and neck in the market. With the expansion of the artificial intelligence (AI) ecosystem, demand for semiconductors is rising and the two companies' earnings are improving sharply, but concerns about an "overshooting" after a short-term surge are also emerging.
Of course, share prices are affected not only by corporate earnings but also by macroeconomic indicators such as growth, inflation, and interest rates, as well as unexpected geopolitical risks like wars. Even if the two corporations continue to improve earnings, it is hard to conclude whether their share prices will rise further and what the fair price is.
It is worth noting, however, that the market's view of Samsung Electronics and SK hynix has changed. Not only is the magnitude of profit growth unusually large, but many experts say profits are expected to surge for at least one to two years and that the advancement of the AI industry has created an environment in which Korea's semiconductor industry benefits structurally.
In the first quarter this year, Samsung Electronics posted 57 trillion won in operating profit. That was up 750% from the same period a year earlier. SK hynix's operating profit also rose by nearly 100% from last year to exceed 37 trillion won.
As hyperscalers that run large-scale data centers for AI dramatically expand their investment, orders are pouring in for Samsung Electronics and SK hynix. Thanks to this, the scale of profits at Samsung Electronics and SK hynix has caught up with those hyperscalers. In the first quarter, Samsung Electronics' operating profit was higher than Microsoft (MS), Amazon, and Meta. The only global companies with more operating profit than Samsung Electronics were Apple and Nvidia.
The business unit that drove the earnings and share prices of Samsung Electronics and SK hynix is memory semiconductors. Memory semiconductors are general-purpose components used to store data in large computers (servers), laptops, and smartphones, and they have a certain cyclical pattern because they are affected by economic conditions.
Experts say this boom differs from past booms driven by the cyclical nature of the industry. Kim Hyeong-tae, a researcher at Shinhan Investment & Securities, said, "A price uptrend that surpasses the memory upcycles we experienced multiple times in the past is becoming a reality."
This can be seen in the rapid rise of the two companies' gross margin (the margin after subtracting manufacturing costs from sales). In the past, when the gross margin of Samsung Electronics or SK hynix exceeded 30%, profitability was considered high. However, next year the gross margins of Samsung Electronics and SK hynix are projected to reach the 70%–80% range.
The reason profitability has improved dramatically even as orders increase is that Samsung Electronics has not stopped at being a subcontractor that simply takes orders from big tech and manufactures products, but has established a supplier-favorable structure.
Customers locked in fierce competition to secure AI infrastructure are focusing on securing volume over price. As a result, the price elasticity of semiconductor products has fallen significantly. This means Samsung Electronics and SK hynix, which receive customer orders, have considerable room to raise product prices.
Mirae Asset Securities, which raised its target price for Samsung Electronics to 400,000 won, said, "A shift in the investor base has been detected, eliminating the previous factors behind valuation discounts."
However, it is difficult to expect further share price gains based solely on upward revisions to profit estimates. What investors want to confirm going forward is the durability of profits rather than their size. There are projections that quarterly operating profit next year could reach 100 trillion won, but how long the period of large profits lasts is likely to determine future share prices.
In this regard, Samsung Electronics and SK hynix each mentioned long-term supply agreements (LTA). After releasing its results, Samsung Electronics said in a Q&A, "This LTA is quite binding and is clearly different from past contracts."
SK hynix projected that it will be difficult for the time being to meet structurally increasing demand. SK hynix said, "This price increase is not due to a temporary supply-demand imbalance but to structural changes in the market," adding, "Customers are prioritizing securing volume over price, and supply companies are facing a continued supply-demand imbalance as short-term capacity expansion is difficult amid slower investment and space constraints."
On top of this, Samsung Electronics' market capitalization has topped $1 trillion, prompting a revaluation. According to Bloomberg, Wall Street in the United States analyzed Samsung Electronics' market cap surpassing $1 trillion as "reflecting the market's judgment that rising demand for memory semiconductors is not merely cyclical, but that the role of semiconductors in AI infrastructure has structurally changed."
Samsung Electronics' market cap has climbed to about 11th globally. Companies with a higher corporate value than Samsung Electronics are Nvidia ($4.78 trillion), Alphabet ($4.68 trillion), Apple ($4.17 trillion), Microsoft ($3.06 trillion), Amazon ($2.94 trillion), Broadcom ($2.02 trillion), TSMC ($1.86 trillion), Aramco ($1.79 trillion), Meta Platforms ($1.54 trillion), and Tesla ($1.46 trillion).
What stands out is the valuation gap with these big tech firms. The 12-month forward PER of Samsung Electronics and SK hynix remains at 6.0 times and 5.2 times, respectively. Compared with the major hyperscalers' average PER above 30 times—Apple (34), Amazon (32), Alphabet (29)—they are still seen as undervalued. Despite sharing in the fruits of AI investment, their valuations are one-fifth.
Meanwhile, SK Securities raised its target prices for Samsung Electronics and SK hynix that day to 500,000 won and 3 million won, respectively.