Here’s What Scares Me About Semiconductor Stocks
Investor response is very different to earnings announcements from Samsung Electronics and SK Hynix. Here’s why, and what investors should really be watching.
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Besides the earnings wipeout from Google (GOOGL) and its parent Alphabet, we’ve also just got numbers from Asia’s largest memory-chip makers, with surprising dispersion in reaction to the numbers.
Samsung Electronics (KR:005930) Thursday announced Q3 earnings that are eye-popping. It notched up record sales of ₩195.3 trillion ($145.8 billion), generating a record operating profit of ₩107.4 trillion ($80.4 billion).
Rival SK Hynix (SKHY) (KR:000660), meanwhile, Wednesday posted its own impressive set of Q3 numbers. Sales hit ₩104.6 trillion ($78.1 billion) while operating profit came in at ₩83.3 trillion ($62.2 billion).
Outdoing Themselves
Both companies outstripped their own projections as well as analyst estimates. But we see a selldown on Samsung stock, and a significant rise in Hynix, up by almost one-fifth this week alone.
It won’t mean much to folks who don’t think in Korean won. But Samsung notes it is the first tech company to exceed ₩100 trillion ($75 billion) in operating earnings. And Hynix notes this is the first time its sales have moved past the same ₩100 trillion mark.
I don’t directly hold either company. But my largest single position is in the Roundhill Memory Exchange Traded Fund (ETF) (DRAM). That has highly concentrated positions in the handful of major semiconductor stocks, with around 75% of its exposure devoted just to Samsung, Hynix and U.S. rival Micron Technology (MU).
Today we do have a meaningful difference in the forward-looking statements from Hynix and from Samsung. Recently, though, the memory makers have sold off on sentiment based around the Artificial Intelligence (AI) trade.
Selling Doesn’t Always Make Sense
It doesn’t always make sense. Heavy infrastructure spending by the “hyperscalers” — Alphabet, Amazon.com (AMZN), Meta Platforms (META), Microsoft (MSFT), Oracle (ORCL) and now including SpaceX Exploration Technologies (SPCX) — implies future heavy buying of memory chips. That should support the share price of Micron et al, but is often punished when industry watchers predict the hyperscalers are getting ahead of themselves.
There is also the “Nvidia (NVDA) effect” that we have come to expect better-than-expected earnings from these companies. You must do better than the better we expected!
As a result, we have typically seen a “sell on the news” effect after results from the semiconductor sector. But the response this week is different.
Samsung Sinks After Early Rise
Samsung has been the biggest disappointment for bulls. Its shares are down 4.1% in Korean trade Thursday. They opened higher ahead of the 10 a.m. earnings announcement but quickly descended, essentially undoing all of Wednesday’s semiconductor rally.
Why? Investors are concerned not by what Samsung said — these continue to be blowout numbers. Operating earnings, after all, are up 782.5% over last year’s comparison. Almost nine times last year’s number!
Investors are worried by what Samsung didn’t say. South Korea’s largest company did not give precise details on how it will distribute its returns to shareholders. We know Q3 dividends total ₩30 trillion ($22.4 billion). But it pledges to pay back another ₩55 trillion to ₩75 trillion, and we don’t know whether that will be paid out in cash or effectively “given” to shareholders via stock buybacks. It pushed back that decision to its board meeting in late January.
Investors to Benefit, However It’s Done
This shouldn’t really matter to long-term investors. They will benefit from the effect however the profits are redistributed. But it did remove a short-term catalyst for traders to move in and out of the stock.
It also contrasts with Hynix. Hynix shares are up 2.6% Thursday in Seoul, adding to strong performance that has taken the stock up 19.2% this week alone.
What about Micron? Its shares are down 4.0%, essentially the same decline as Samsung. It is sympathy selling mimicking Samsung and the Google selloff. Micron reported a full month ago, on September 30, and doesn’t have any market-moving news of its own Thursday.
Better Communication From Hynix
It is a stark divergence. And it is unusual under current market conditions, when semiconductor stocks tend to move in lockstep with one another.
Samsung was of course originally better known as a consumer-facing brand, particularly its Galaxy line of smartphones. But its memory business drove this set of numbers, producing record sales and operating profit due to the sky-high prices for memory chips of all sorts.
SK Hynix specializes pretty much exclusively on the top-flight High Bandwidth Memory (HBM) chips that power the processors that run the functions of AI. It is far more focused.
Hynix has delivered better communication, removing the uncertainty that markets so famously hate. It has pledged to return ₩100 trillion to shareholders this year, including dividends of “₩30 trillion or more.”
On Wednesday alone, Hynix pledged a Q3 dividend of ₩14 trillion, and a share repurchase of ₩20 trillion. Last week, it already completed ₩40 trillion in buybacks that it announced in August.
The dividend is ₩20,000 per share. Half of that is from earnings, and half is a special dividend to return some of the profits from its investment into Japanese chipmaker Kioxia Holdings (T:285A).
Hynix joined a 2018 consortium led by Bain Capital that bought Toshiba’s former memory-chip operations, and rebranded them the next year as Kioxia. Kioxia has seen such a strong runup in its share price in 2026 — its stock has quadrupled in 2026 — that it briefly became the biggest company in Japan by market capitalization. Bain has now sold its entire stake, and Hynix is returning some of its profits to shareholders.
Kioxia = Microcosm of Chip Sector
We can see just how volatile the semiconductor sector has been when we look at how Kioxia has performed. Its stock is a microcosm of the sector, up 941.8% from the end of last year through its June 22 all-time closing high. But Kioxia is also down precisely 60.0% since its June highs.
Your entry point, then, very much matters. You may have made more than triple your money on Kioxia if you’ve held it all year. Or you may have lost more than half your holding if you bought into it at mid-year.
As a long-only investor into both Samsung and Hynix, I’m not that bothered by how Samsung does distribute the extra profits to shareholders. Whether that’s in the form of share buybacks and stock cancellations, or in the form of direct cash dividends, shareholders reap the benefit. The board has just pushed the decision on the breakdown to its shareholder meeting in late January.
Disappointed Traders Move Out of Samsung
So Thursday’s selloff is just produced by disappointed traders who wanted to score a quick cash payout on the dividend. There’s also the typical sell-on-numbers effect we have come to expect from these highly crowded trades.
Samsung’s delay in detailing its shareholder compensation doesn’t bother me. Both it and Hynix are returning similar sums to shareholders.
What would bother me is any indication that chip prices are slipping. For that, we have to look to data providers like TrendForce and its DRAMeXchange subsidiary.
Here’s the Real Worry
For the time being, contract prices for HBM chips are up 70% to 140%, which we would expect for the highest-performance chips. Server DRAM chips, which require exceptional reliability, are up 270%. But conventional DRAM chips that go into, say, your laptop or PC are also up 150% to 200%.
That’s not normal. We would expect prices for conventional memory chips, products that are essentially commoditized, to fall in the long run. And we can see that the price per gigabyte falls dramatically over time, in this research at Stanford University. What’s more, DRAM prices declined precipitously until a surprising uptick that started in 2024. That’s not long after the debut of ChatGPT at the end of 2022.
In other words, these earnings from the semiconductor stocks cannot continue like this. That much we know. Hynix, for instance, notched an operating margin of 80% in Q3, a totally unreasonable level of profitability that it surely cannot sustain.
Hynix Sees Structural Imbalance Through 2030
But it may be able to sustain it next year. The memory-chip bottleneck looks set to stay in place for all of 2027, since the chipmaking capacity has already been pre-bought by customers for the entirety of the year, and into 2028.
Hynix, in fact, says in this week’s earnings that it expects the structural supply/demand equation to remain out of whack until 2030. This trade could have far further to run.
Samsung is expecting the capital expenditure (capex) spending on AI infrastructure to sustain its boom into next year. That suggests continued strong demand for its chips, particularly HBM chips, server DRAM chips, and sold state drives (SSDs).
What’s more, “increasing AI-driven demand will far exceed the industry supply in comparison with 2026,” the company predicts. Next year, in other words, should be even better.
Watching the Price of Cheaper Chips
HBM prices are projected to rise 122% in 2027, according to TrendForce. But what’s peculiar is that TrendForce anticipates a 46% rise in the total DRAM market for 2027. Prices are likely to remain squeezed for the lower-end PC chips because the chipmakers are prioritizing HBM production, and the total production of PC chips is projected to fall slightly in 2027 as a result.
It takes years and years and billions of dollars to build a chip plant. The likes of Taiwan Semiconductor Manufacturing Co. (TSM) (TW:2330) are laying down record levels of capital expenditure to expand, with $265 billion allocated already to its major “fab” expansion in Phoenix. But it will take time for that capacity to come on stream.
Prices are “unlikely to return to 2025 levels” at any point during 2027, according to semiconductor industry tracer IDC.
Still, there will come a time when the supply of cheaper chips once again starts to form a glut on the market. Samsung was, in fact, suffering from such conditions in a way that saw its shares sink almost 40% from the spring of 2024 through the end of that year.
Watch the price of the cheaper, commoditized chips for signs of future weakness. That’s where we would expect to see the competitive pressure form from the likes of Chinese chipmaking upstart ChangXin Memory Technologies (SH:688825) or CXMT. If competition starts to produce declines in lower-end chip prices, it’s time to sell these semiconductor stocks, Samsung in particular.
At the time of publication, McMillan was long DRAM.
