Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

### Key Takeaways

1. **AI Hype vs. Reality Check:** Despite a massive surge in operating profit, SK Hynix’s earnings miss against elevated forecasts has triggered a significant sell-off in chipmaker stocks, signaling investor anxiety about the sustainability of the AI boom’s valuation and demand trajectory.
2. **Geopolitical & Oversupply Concerns:** A Reuters report on China’s progress in DUV lithography and concurrent multi-billion dollar capacity expansion plans by major chipmakers globally are fueling fears of intensified competition and a potential oversupply, reigniting the industry’s historically volatile boom-bust cycle.
3. **Market Volatility & Regulatory Intervention:** South Korea’s Kospi index, heavily concentrated in semiconductor giants and influenced by leveraged ETFs, experienced extreme volatility, prompting regulatory adjustments that further unsettled the market and underscored systemic risks within highly concentrated sectors.

***

**Seoul, South Korea** – The global semiconductor sector, a bellwether for technological advancement and a darling of the recent AI-driven market rally, faced a harsh reality check this week as investors continued to offload chipmaker stocks. The catalyst was a seemingly paradoxical earnings report from SK Hynix, the world’s second-largest memory-chip maker, which despite reporting a phenomenal surge in operating profit, still managed to disappoint market expectations. This recalibration of investor sentiment sent a ripple of concern across Asian markets and beyond, raising critical questions about the durability of the AI boom and the industry’s notoriously cyclical nature.

On Wednesday, SK Hynix reported an astounding 557 per cent year-on-year surge in operating profit to a record Won60.5tn ($42bn) for the three months ending June 30. However, this colossal figure fell short of the Won64tn forecast by LSEG SmartEstimate. Similarly, sales, while jumping 257 per cent to Won79.3tn ($55bn), also missed analyst estimates. In the high-stakes world of semiconductor investing, where future growth is often priced in far in advance, even a stellar performance can be perceived as a miss if it doesn’t meet the most optimistic projections.

The market’s reaction was swift and brutal. Shares in SK Hynix initially plunged nearly 19 per cent before paring some losses to trade down 6 per cent by close. This sent a shiver through Seoul’s Kospi index, which had already tumbled on Tuesday, dropping as much as 13 per cent before recovering slightly to close down 6 per cent. Samsung Electronics, SK Hynix’s larger domestic rival and another pillar of the Korean economy, weakened 3.9 per cent in sympathy.

The sentiment reflected a growing unease that the semiconductor market might have “run too fast too far,” a concern articulated by Song Zhe at BNP Paribas Asset Management. He noted that a period of “blind belief” in perpetual growth for the memory market was now giving way to a more sober assessment.

Adding a geopolitical dimension to the unfolding drama was a Reuters report suggesting China’s imminent mass-production of its own deep ultraviolet (DUV) lithography machines. DUV machines are crucial for advanced chipmaking, and China’s self-sufficiency efforts represent a significant strategic shift that could impact the global supply chain and the dominance of Western manufacturers like ASML. Kim Young-geon, an analyst at Mirae Asset Securities in Seoul, promptly cut SK Hynix’s target price, citing investor concerns over China’s lithography advancements. He emphasized the critical shift in focus towards “the sustainability of the industry’s improved profitability,” rather than just headline growth.

Further exacerbating the volatility, particularly in South Korea, were impending market restrictions. Regulators in Seoul have set a minimum cash requirement for investing in single-stock leveraged exchange-traded funds (ETFs), instruments they have previously blamed for amplifying market swings. Investors pre-empted these changes, contributing to the selling pressure ahead of their Friday implementation. The Kospi, according to Eurasia Group analysts, has exhibited nearly twice the volatility of Japan’s Nikkei 225 this year, even surpassing Bitcoin in its wild swings, largely due to its concentrated exposure to a few tech giants and the influence of leveraged products.

The contagion spread across Asia, with Tokyo’s Nikkei 225 falling 1.5 per cent, bringing its total decline to over 15 per cent since its June peak. Semiconductor and AI-related stocks were hit hard, including component maker Murata Manufacturing, memory-chip maker Kioxia, and equipment giants Tokyo Electron and Lasertec. In Europe, ASML, the world’s largest maker of chip-manufacturing equipment, saw its shares fall 1.2 per cent. Even US semiconductor stocks, which suffered sharp losses on Tuesday, saw their futures tracking the Nasdaq 100 remain flat, indicating continued investor apprehension.

SK Hynix stock itself has now shed over half its value since its June peak, a stark reversal for a company whose shares had soared more than sevenfold over the preceding year. The recent earnings miss also highlighted SK Hynix’s greater exposure to high-bandwidth memory (HBM) chips, vital for AI hardware, which paradoxically left it less able to fully capitalize on rising prices for conventional memory chips.

Beyond immediate earnings, broader concerns over potential oversupply are weighing heavily on sentiment. Major Korean chipmakers, including SK Hynix and Samsung, unveiled ambitious investment plans last month to build four new chipmaking plants in South Korea for a staggering Won800tn ($530bn), aiming to double DRam chip capacity within five years. US rival Micron Technology is also committing $250bn domestically until 2035. While these investments signal long-term confidence, they also raise the specter of a glut, a familiar narrative in the cyclical chip industry. Soaring memory costs are also a concern, with fears that customers might curb demand or seek cheaper alternatives.

Despite these anxieties, SK Hynix executives maintain an optimistic outlook. On an analyst call, SK vice-president Park Joon-deok asserted that the risk of memory oversupply from capacity expansion remains “limited,” predicting tight supply for a “considerable” period as demand continues to outstrip production. They anticipate cloud service providers to sustain increasing AI spending beyond 2027 and pointed to long-term supply agreements, typically extending five years, as a mechanism to mitigate exposure to short-term memory-price volatility. “We are trying to focus on securing mid-to-long-term business stability by reducing uncertainties stemming from short-term market volatility,” Park stated, emphasizing flexibility to capture growth opportunities.

The intensifying competition from Chinese chipmakers, exemplified by Chinese DRam maker CXMT’s recent $8.5bn blockbuster Shanghai listing, further complicates the landscape. However, SK Hynix executives remain steadfast in their belief that AI is fundamentally reshaping demand dynamics within the cyclical memory industry, with longer-term supply agreements offering improved earnings visibility. The company projects the chip shortage could persist beyond 2030, supported by significant capacity expansions, including a $4bn chip-packaging plant in Indiana, with Chair Chey Tae-won pledging investments “well beyond” the already committed $35bn in the US.

### Market Impact

The recent turbulence in semiconductor stocks, triggered by SK Hynix’s mixed earnings, represents a crucial moment for investors grappling with the valuation and longevity of the AI narrative. This sector-wide sell-off suggests a broader market recalibration, where the exceptionally high growth expectations for AI-driven demand are being scrutinized against actual corporate performance and underlying supply-demand dynamics. For equity investors, this signals increased volatility and a potential flight from highly speculative growth stocks towards more fundamentally sound or diversified plays. The geopolitical implications of China’s advancements in chipmaking capabilities introduce a new layer of risk, potentially disrupting established supply chains and intensifying technological competition, which could impact the long-term profitability and market share of current industry leaders. Furthermore, the massive capital expenditure plans across the industry, while promising future capacity, raise the specter of oversupply, challenging the “higher for longer” pricing power that has benefited chipmakers. Investors will be closely monitoring upcoming earnings from other major tech and semiconductor firms for confirmation of demand trends, as well as geopolitical developments and any further regulatory interventions that could impact market stability and investment flows, particularly in highly concentrated markets like South Korea.