Hynix's Most Profitable Quarter Ever, Why Is It Still "Falling Short of Expectations"?

Original | Odaily Planet Daily (@OdailyChina)

Author | Azuma (@azuma_eth)

On July 29, Beijing time, SK hynix released its Q2 2026 financial results.

The earnings data shows that SK hynix recorded revenue of 79.32 trillion KRW in the second quarter, up 257% year-over-year and 51% quarter-over-quarter. Operating profit reached 60.54 trillion KRW, up 557% year-over-year and 61% quarter-over-quarter, with the operating margin further rising to a record high of 76%. Including a one-time investment gain of 62.166 trillion KRW from the sale of a portion of its stake in Kioxia, the company's net profit reached 93.92 trillion KRW.

In any industry, this would be a report card shocking enough to shake the market.

However, the initial reaction from the capital market was the complete opposite. As both revenue (actual 79.32 trillion KRW vs. market expectation of 84 trillion KRW) and operating profit (actual 60.54 trillion KRW vs. market expectation of 64 trillion KRW) slightly missed market expectations, coupled with SK hynix's stock price having already corrected over 40% in the past month, pessimistic sentiment intertwined. Following the earnings release, SK hynix's US ADR fell about 9% in after-hours trading (its US stock had already closed down nearly 9% the previous day). However, as investors digested the details of the report, the stock price quickly recovered all its losses and even turned positive.

Meanwhile, in the Korean stock market this morning, SK hynix shares opened higher, initially rising 4%, but then gradually weakened, falling over 9% again as of 10:00 AM.

Why did a record-breaking earnings report first suffer a massive sell-off, quickly recover its losses, and then plunge again sharply? The answer likely lies in the fact that the market cares about much more than just how much SK hynix earned in the second quarter. The real question is how to re-price the future growth potential – and the bulls and bears have clearly not yet reached a consensus on this.

The Most Profitable Quarter Ever: Why Did It Still Miss Expectations?

Looking purely at the numbers, SK hynix is arguably still at its peak profitability.

In the second quarter, the company's gross margin reached 83%, and its operating margin hit 76%. This means for every 100 KRW of products sold, approximately 76 KRW was converted into operating profit – a profitability level that surpasses the vast majority of global semiconductor companies. At the same time, the company's cash and short-term financial assets continued to grow rapidly to 87.96 trillion KRW, further expanding its net cash position and providing ample ammunition for subsequent capacity expansion.

But the problem is that the market had already set the bar even higher. The consensus expectation for SK hynix's Q2 revenue was around 84 trillion KRW, with operating profit around 64 trillion KRW. The actual figures came in about 5% and 6% below these expectations, respectively.

For most companies, such a deviation is not large. But for SK hynix, which has been labeled the "biggest AI beneficiary" and whose valuation is based on high-growth expectations, any data falling short of expectations is amplified by the market.

A closer look at the earnings reveals that this "miss" was not actually driven by a deterioration in market demand, but rather by a shift in the company's earnings structure.

First, a somewhat counterintuitive point: the increasing share of HBM products has actually dampened profit elasticity. In recent quarters, the rapid profit expansion across the memory industry was fueled by rising spot prices for traditional DRAM and NAND. However, because SK hynix's HBM revenue share is much higher than its peers, and HBM is more heavily tied to long-term supply agreements (LTAs) for pricing, the company cannot fully capture the benefits of rapid spot price increases like it can with regular DRAM.

Additionally, SK hynix disclosed that the average selling price (ASP) for its general DRAM increased by about 30% quarter-over-quarter in Q2. While still growing, this pace has clearly slowed compared to Q1. NAND ASPs rose by 50%-55% quarter-over-quarter, also decelerating from the first quarter.

In other words, SK hynix sold more AI products, but the price growth of its traditional products slowed down. Long-term contracts lock in future revenue but also limit short-term profit elasticity. This is why record-breaking profits still failed to meet the numbers the market had already "fantasized" about.

Is the Memory Super Cycle Still Alive? What the Earnings Tell Us

If the operational data answers how much SK hynix earned in Q2, the information provided by management during the earnings release and subsequent conference call answers another question the market cares about even more: Is the AI memory super cycle starting to cool down?

So far, SK hynix's answer remains relatively optimistic.

First, regarding the demand outlook, the company did not signal any obvious caution as the market had feared. SK hynix forecasts that global DRAM market demand in 2026 will still grow in the mid-20% range year-over-year, while NAND market demand will grow in the high-teens percentage range. During the earnings call, management also stated that they have yet to observe any signs of a slowdown in AI investment and expect AI infrastructure investment to maintain steady growth even after 2027.

Second, another key piece of information worth noting is the further progress of Long-Term Supply Agreements. SK hynix disclosed that the company has now completed LTA negotiations with about 10 clients and is continuing discussions with other major industry customers. The new generation of LTAs will adopt pricing mechanisms that can cope with price fluctuations and will use corresponding financial mechanisms to ensure contract fulfillment, thereby enhancing the stability and predictability of future demand.

For the memory industry, the significance of this change is substantial. In the past, products like DRAM and NAND relied more on spot market pricing, and drastic price fluctuations prevented the industry from shedding its "cyclical stock" label. However, with the rising share of HBM products in the AI era, a growing number of large cloud providers are securing supply capacity years in advance, and the supply-demand relationship is gradually evolving from short-term speculation to a more long-term, stable partnership. While long-term agreements may compress profit elasticity during periods of rapid spot price increases, as seen this quarter, they bring higher revenue certainty in the years to come.

Furthermore, the rollout schedule for SK hynix's next-generation products has not encountered any surprises. The earnings report shows that SK hynix began shipping HBM4 products in the second quarter and plans to ramp up volume production in the second half of the year. The next-generation HBM4E has also been sampled to key customers in the first half of the year. Additionally, the SOCAMM2 product, based on the 1cnm process, has officially started volume shipments.

This means SK hynix maintains its leading product cadence for the next generation of AI GPU platforms. Considering that HBM4 will be a crucial accompanying memory for NVIDIA's next-generation AI platforms like Rubin, its successful ramp-up implies the company continues to hold a dominant position in the high-end AI memory market.

Finally, in terms of Capital Expenditure (CapEx) – the metric that most accurately reflects management's true judgment – SK hynix not only maintained its 2026 CapEx guidance at the high end of over 40 trillion KRW, but also plans to accelerate the mass production timeline for the M15X fab, speed up Phase 1 construction in Yongin, and continue advancing mid-to-long-term projects like P&T7, M17, and the new semiconductor cluster in Korea.

For a company that has weathered multiple memory cycles, such an aggressive expansion plan itself is a strong statement: Management firmly believes that the AI memory demand in the coming years will be sufficient to absorb these new capacities.

The Focal Point of Bull vs. Bear Debate

Today, SK hynix has become the core battleground for bulls and bears in the AI memory cycle.

For the bulls, record profits, continuously expanding HBM demand, and the AI infrastructure investment cycle still support the company's long-term growth narrative. For the bears, the earnings miss, valuation pressures, and market concerns about the sustainability of AI capital expenditures are amplifying short-term correction risks. The bulls are betting that AI infrastructure expansion will continue; the bears are worried that the market has already over-discounted future growth.

Heavy is the head that wears the crown. SK hynix enjoys the valuation of an industry leader and must inevitably bear the leader's pressure. When the market already believes in your story, strong performance is no longer enough. Only by continuously surpassing ever-higher expectations can the valuation continue to climb.