Big Tech Corporate Bond Issuance, Steep Drop in Semiconductors Background

Major big tech companies, including Alphabet, have seen their free cash flow (FCF) turn negative as capital expenditures exceed operating cash flow due to expanded data center investments. This contrasts with past practices where capital expenditures were covered by free cash flow, raising market concerns that even with profits, year-end balances could decrease. Mok Dae-gyun, CEO, explained, "When they make investments, operating cash flow minus investment amount—capital expenditures—resulted in negative free cash flow, or what we call FCF. Investors are feeling uncomfortable with this change."

SK Hynix's high-bandwidth memory (HBM) sales proportion has been growing significantly since the second half of 2023, establishing itself as a core growth driver by 2025. HBM offers two to three times higher margins than standard memory, greatly contributing to profitability improvement. Demand is exploding as it is a crucial component for GPU operations, which are essential for building data centers. Mok Dae-gyun, CEO, emphasized HBM's importance, stating, "As we move past 2024 into 2025, the proportion of HBM sales has increased. All investors have been paying attention, and Jensen Huang said a few years ago that AI-related investments would reach $5 trillion by 2030."

Major big tech companies like Meta and Amazon have announced capital raising through corporate bond issuance to fund large-scale data center investments, as internal cash flow alone is insufficient. This is considered an unusual shift, moving away from past methods of covering investments solely with free cash flow, and diversifying funding sources. Notably, in an environment of rising long-term interest rates, the borrowing rates for big tech companies have significantly increased from around 1% in the past to currently 5%, causing considerable market shock. Mok Dae-gyun, CEO, explained Wall Street's reaction, saying, "We would issue corporate bonds. Wall Street was shocked then. Why is Meta issuing corporate bonds when you have sufficient cash flow? It's because they need a bit of money to build data centers."

The global annual AI investment is estimated to be around $1 trillion, with the U.S. accounting for approximately $750 billion. Big tech companies, with low debt ratios, are analyzed to have the capacity to raise up to an additional $2 trillion based on figures. Mok Dae-gyun, CEO, stated, "Globally, if you look at it annually, it seems that about $1 trillion, globally, about $1 trillion of AI investment is being made. Numerically, if you look at big tech companies, they can sufficiently raise up to about $2 trillion." While there appear to be no major financial issues for now, market skepticism is growing regarding the possibility of sustained large-scale fundraising in the future. This raises concerns that it could act as a long-term upward pressure on interest rates.

Current AI investment, as a percentage of U.S. GDP, stands at about 2%. This falls within the 2-5% range observed during past periods of large-scale infrastructure investment in sectors like railways, electricity, and telecommunications. While the absolute amount is enormous, historically speaking, current AI investment is not considered excessive in terms of its proportion. Mok Dae-gyun, CEO, explained, "It's about 2% of U.S. GDP. So it falls within the 2% to 5% GDP range. Historically, you might ask, 'What is this amount?' Although the actual amount is incredible, if you only look at the proportion, right? When you look at the benchmark, it's not large, they think."

An analysis suggests that Samsung Electronics' current stock price is excessively suppressed in terms of its multiple (price-to-earnings ratio) compared to its earnings growth, indicating an undervaluation of 4-5 times when compared to its historical average multiple of 10. Mok Dae-gyun, CEO, commented, "Wouldn't it be undervalued by four to five times right now? If you look at the past, Samsung Electronics should be trading around a 10-times multiple, we think." This suggests that the current stock price is in an undervalued range.

Recently, over ₩100 trillion in foreign capital has exited the domestic stock market, primarily attributed to profit-taking in the first half and mechanical rebalancing. Currently, foreign investors appear to be observing the market due to increased volatility. Mok Dae-gyun, CEO, explained, "Foreign investors mechanically rebalanced, but they also divested a large sum, exceeding ₩100 trillion. Will those people come back? Well, they've gone out." He emphasized that foreign selling is based on short-term supply and demand factors.

Foreign investors consider the argument of a peak-out in the domestic semiconductor market to be premature. As seen in Nvidia's guidance of 70% revenue growth for 2027, there are no signs of weakening in order volumes or leading indicators. This perspective suggests that the recent sharp decline is merely profit-taking after a rapid surge, not a fundamental deterioration. Mok Dae-gyun, CEO, relayed foreign investors' perceptions, stating, "After much discussion, they also believe the peak-out cycle is a bit early. What earnings have faltered? What orders have faltered? Is there anything among the leading indicators that is faltering?"

Samsung Electronics and SK Hynix are evaluated as still highly attractive investments compared to other equipment manufacturers or cyclical industries, thanks to 2-3 year long-term supply contracts that enhance revenue predictability. Possessing a monopolistic business structure, they are expected to generate stable profits in the future. Mok Dae-gyun, CEO, emphasized the investment value of the two companies, explaining, "I believe that future revenue visibility for about two to three years has become higher than expected, so compared to other equipment companies or other cyclical industries, the attractiveness still exists more than you might think."

For foreign investors to return to the Korean stock market, it is crucial for the market to demonstrate its self-restoring power in a situation where capital has rapidly exited. The market must show that it possesses resilience—the ability to revert to the mean when prices fall excessively relative to fundamentals. Mok Dae-gyun, CEO, commented, "When considering whether the Korean stock market will be good for foreign investors or long-term institutional investors, the question of whether it can maintain a certain level of resilience when capital exits all at once is a very important test."

Even in the U.S. stock market, semiconductor companies like Micron and SanDisk exhibit very high stock price volatility. In the case of the Korean stock market, Samsung Electronics and SK Hynix hold the top two positions in market capitalization, meaning their movements directly translate into index volatility, a structural characteristic. This high volatility also serves as a trading opportunity for foreign investors seeking short-term profits. Mok Dae-gyun, CEO, explained, "Even in the U.S. stock market, Micron and SanDisk have very high volatility. But our country is a country where Micron and SanDisk are the number one market cap companies. Since Samsung Electronics and Hynix have high market caps, the index moves as much as Samsung Hynix moves, but Samsung Hynix's global competitiveness doesn't suddenly disappear, does it? We just acknowledge that the stock price volatility is a bit severe."

For the Korean stock market to experience a rebound rally, Samsung Electronics and SK Hynix must first play a somewhat leading role. Furthermore, the market must see the upward trend extend beyond the memory semiconductor sector to other stocks. This is crucial for providing an attractive environment for active investors by spreading portfolios in a balanced way rather than concentrating on specific stocks, and for establishing a basis for foreign investors to evaluate the Korean stock market in a balanced manner. Mok Dae-gyun, CEO, emphasized, "Samsung and Hynix must lead to some extent for a rebound rally to unfold, and while memory will rebound, other stocks must also rise. A market that grows overall, centered around that, is good for active investing and allows foreign friends to build balanced portfolios."

An analysis suggests that finding immediate alternative investment options other than memory semiconductors in the domestic stock market is difficult in the short term. In a sharp downturn, merely selling specific assets and buying others like gold or Bitcoin is unlikely to offset losses. Therefore, the appropriate countermeasure is to pursue portfolio diversification while awaiting the recovery of the memory semiconductor sector. Mok Dae-gyun, CEO, advised, "If memory doesn't perform, there's no answer in the short term. So, it's right to diversify your portfolio by expanding to individual stocks after memory recovers to some extent, because selling all assets and buying, for example, gold and Bitcoin, cannot offset the losses you've incurred."