While the recent decline in shares of Samsung Electronics (005930.KS) and SK hynix (000660.KS) has pushed their valuations down to historically low levels, using this as a basis to increase holdings now would be unreasonable, according to a brokerage assessment.
The analysis holds that amid a situation where earnings forecasts are being raised on the back of the semiconductor super-cycle, a low price-to-earnings ratio (PER) may not signal undervaluation.
Even at PER Lows, Additional Buying Is Premature
According to LS Securities, the valuations of Samsung Electronics and SK hynix, the leading semiconductor stocks, have fallen to historically low ranges amid the recent sharp share price declines.
Hwang San-hae, an analyst at LS Securities, said in a report on the 9th, "As the recent share price declines and upward earnings revisions of Samsung Electronics and SK hynix have occurred together, their 12-month forward PER stands at 4.8 times and 5.3 times respectively, representing historically low ranges." He added, "While valuation appeal is at a level worth highlighting, considering the discount structure characteristic of AI cycle leaders and valuation errors that occur during periods of rapid earnings reassessment, it falls short as a rationale for further increasing holdings."
His point is that rather than increasing buying based on numbers alone, one must also consider the discount structure that appears due to the nature of the AI cycle and the distortions in the earnings reassessment process.
Supply Expansion, Bottleneck Variables Complicate Buying Decisions
Big Tech firms currently leading the AI cycle, such as Alphabet and Meta, face a dual burden of having to increase capital expenditure (CAPEX) to avoid being pushed out of the cycle while also lowering technology unit prices to secure profits.
Semiconductor companies benefiting from this trend also have no choice but to rush to expand bottlenecked memory supply before the overall AI cycle turns down, according to Hwang's assessment. Ultimately, the possibility that memory semiconductors could revert to being a cyclical sector swayed by investment and supply variables is cited as another factor causing hesitation over increasing holdings.
Hwang predicted that if the profits of AI intermediate goods companies grow excessively, hyperscalers' (ultra-large cloud operators') capacity to sustain investment could also be shaken.
He stressed, "As pressure on the return on investment (ROI) of hyperscalers' AI spending intensifies, it could result in the justification for further investment execution being shaken." He added, "Samsung Electronics and SK hynix's operating profit has surged to 57% of hyperscaler capital expenditure, which is higher than the past Nvidia bottleneck."
The fact that memory bottlenecks are delaying device replacement cycles is also cited as another reason to be cautious about increasing holdings. Hwang said, "The memory benchmark needed for practical use of AI is showing a steadily rising trend." He continued, "But at the same time, memory bottlenecks are occurring and pressuring the device market, which is a factor fundamentally delaying the spread of AI."
Hwang also explained, "(The current point) is a period in which the market verifies the sustainability of that profit level, and a phase that pre-reflects supply expansion and future margin damage." He noted, "The cases of Alphabet, Meta (2020-2022), Amazon (2017-2018), and Nvidia (2023-2024) attest to this, and the memory sector is currently positioned in the same valuation trap phase."
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