UBS Initiates SK Hynix With 'Buy' Rating, Citing Untapped AI-Driven Profitability

UBS initiated coverage on SK Hynix's American Depositary Receipts (ADR) with a Buy rating and a $204 price target, asserting that the market is underestimating a structural increase in the memory chipmaker's profitability fueled by artificial intelligence.

AI to Reshape Memory Market

In a note to clients, UBS analyst Nicolas Gaudois stated that the memory industry has "drastically changed," with agentic AI expected to significantly boost demand for memory bits through 2027. The bank's analysis suggests the market is not fully pricing in this fundamental shift.

UBS projects an acceleration in demand growth for key memory products:

• DRAM bit demand: Forecast to grow 36% year-over-year in 2027, up from 22% in 2026.
• NAND bit demand: Expected to grow 23% in 2027, increasing from 20% in 2026.

Valuation Disconnect

Ad

The bank highlighted that SK Hynix's ADR has fallen 33% from its July 14 peak and is trading below its offering price. At current levels, UBS believes the stock discounts a long-term return on equity (ROE) of 17.7%, which is in line with the historical average before the AI era (2012-2022).

This contrasts sharply with the bank's own forecast for an average ROE of 40.2% between 2027 and 2031. UBS concluded that the current share price fails to reflect the potential for higher profitability, stronger free cash flow generation, and enhanced shareholder returns.

Q2 Operational Highlights

Insights from SK Hynix's second-quarter results support the bullish outlook, according to the note. The company is signing revised long-term agreements at a faster-than-expected pace, which may cap near-term pricing but is expected to be accretive to margins over the long term.

Despite being held back by a higher mobile mix, DRAM average selling prices (ASPs) still rose 30% quarter-over-quarter. Furthermore, management raised its capital expenditure guidance to the "high Won40tn" range, signaling confidence in future demand.