Morgan Stanley Recommends 'Strong Buy' on Samsung Electronics and SK hynix… August Chip Exports Surge 155%, Counterattack Begins

Right after the sharp semiconductor market selloff at the end of July, Morgan Stanley assessed that this selling represents a strong entry opportunity. In particular, it forecast that NAND prices would rise more than 25% across the second and third quarters, stressing that it is a 'strong entry point.'

The starting point of the chip market plunge was an issue involving Meta. Google's CEO mentioned a shortage of semiconductors for Meta's latest models, which suggested a supply shortage of chips for the newest models. Then SK hynix's capacity expansion plans and the production increase at Chinese chipmaker CXMT overlapped, and concern about overall chip supply spread through the market. These factors acted together to drive chip prices lower.

Demand is still growing explosively, and this trend is unlikely to reverse easily. Sandisk signed a long-term supply contract worth $93.9 billion, which suggests downward pressure on chip prices will be limited. This means that prices are unlikely to fall sharply as the supply shortage deepens.

Forecasts for DRAM and NAND prices in the third quarter are being revised upward. In particular, reports say Micron has demanded server DRAM price increases of 115% to 125%. SLC (single-level cell) NAND surged 35% to 51% in July alone. Although overall DRAM and NAND market momentum may appear to be slowing, attention is being drawn to the fact that price gains remain strong in specific areas such as high-bandwidth memory (HBM) and server DRAM.

SK hynix's price-to-earnings ratio (PER) is currently 3.47 times and Samsung Electronics' is 3.81 times, both very low levels. This means the stocks are trading far below their earnings value. Based on past experience, a PER below 4 is judged to be a time to actively enter the stock. This undervaluation supports the analysis that there is significant room for share prices to rise. It appears to reflect market fear being overly priced in.

Before the leveraged ETFs launched, the market-cap share of Samsung Electronics and SK hynix was about 50%, but after launch it rose to as high as 59%. Recently, however, this share has fallen to 46–47%, below the level before the leveraged ETF launch. Margin loan balances have also fallen 29% from their peak, approaching the average historical decline of 25%, and the market cap of leveraged ETFs has returned to its listing-time level. Considering these indicators, the judgment is that the deleveraging process is nearly finished and a sustained downtrend is unlikely from here.

Samsung Electronics hit its year-on-year earnings peak in the second quarter and SK hynix in the third quarter, which raised peak-out concerns. But Nvidia hit its earnings peak in 2023 and its share price kept rising, and TSMC also had earnings peaks in 2023 and 2024 while its stock continued to climb. These cases show that an earnings peak does not necessarily lead to a share price decline, suggesting the peak-out claims about current chip companies may be premature.

For Samsung Electronics, the third quarter of 2017 was the year-on-year momentum peak, but its share price peaked in the fourth quarter of that year, in November. SK hynix's year-on-year peak came in the second quarter of 2017, but its share price did not peak until about a year later, in May 2018. This shows that even after earnings momentum passes its peak, share prices can keep rising for a while, lending support to the view that the current momentum slowdown will not immediately translate into share price declines.

While momentum may have peaked and share price upside may soften somewhat, this could be a short-term phenomenon, and it is premature to judge the overall uptrend as broken. The analysis stresses that, given structural changes in the chip market and long-term demand growth, one should take a long-term view rather than reacting to short-term price swings.

With the announcement that Nvidia will reduce HBM4 memory capacity per product, the market has produced a range of interpretations. Some speculated that because Samsung Electronics passed HBM4 quality testing while SK hynix has not yet done so, Nvidia lowered specifications to fit SK hynix's situation. Many rumors have circulated around this, adding to market confusion. The controversy has raised concerns about SK hynix's future competitiveness in the HBM market.

Even if HBM production rises, the situation is such that expected volumes for next year cannot be met. The explanation is that even with somewhat lower specifications, more products must be made to increase the number of units supplied. The analysis holds that this is not a sign of falling demand but a strategic choice to build a product mix that can be supplied, given the severity of the supply shortage.

The product mix and average selling price (ASP) debate could weigh negatively on SK hynix in the short term. However, given that SK hynix's PER is only around 4, the analysis holds that it is hard to recommend further selling on this basis. Samsung Electronics, by contrast, is seen as having a chance to gain relative market share by earning certification for lower-spec HBM. This suggests different investment opportunities may arise depending on each company's situation and strategy.

Samsung Electronics announced record earnings of 89.4 trillion won in the second quarter alone, and SK hynix 60.5 trillion won. With share prices having fallen sharply and PERs below 4, shareholder return measures such as dividend increases or buybacks and cancellations are considered likely. These policies are expected to help restore investor confidence and provide enough momentum for share prices to rise.

However, the analysis stresses that to move to 6, 7, or 8 times and beyond, market confidence in the chip cycle must rise further. In other words, shareholder returns may serve as a short-term support, but the ultimate share price rise has to come from the industry's underlying strength.

This is viewed as very positive news given that a supply shortage in the chip market is expected to continue through next year. Higher production is expected to translate into higher sales and profits, contributing to an improvement in SK hynix's earnings. The decision to boost output, especially at a time when NAND price gains are anticipated, is read as a sign of its willingness to respond actively to market demand.

While TrendForce forecasts chip prices will rise 15–18%, Morgan Stanley has raised its outlook, expecting a 25% increase. Such an upward revision is expected to push companies' profit expectations higher. Higher earnings forecasts make current share prices look relatively cheaper, and if confidence in earnings grows, valuations could normalize. This raises expectations that undervalued chip stocks could rise toward their intrinsic value.

Right now the market tends to highlight negative chip-cycle issues, but if Solidigm lists and its value is properly recognized, that could also have a positive effect on SK hynix's overall corporate value. However, because the listing timeline, size, and specific execution method have not been clearly determined, the position is to treat it as a neutral variable and watch until the plans take shape rather than rushing to judgment.

Typically, the month after quarter-end export pushes in January, April, July, and October tends to see exports decline from the prior month. However, July's month-on-month decline was just -9.3%, the smallest in the past four years, showing that exports held up firmly. Moreover, chip exports through August 10 rose from July levels, and attention has turned to whether they will exceed June's level. These data suggest the chip cycle still has strong momentum, and they served to quiet peak-out concerns.

In the past too, valuation indicators such as PER led many analysts to say 'you must buy no matter what,' yet share prices were cut by 40% to 50%. Once market trust is lost, it is very hard to win back. Investors are waiting for trust to be rebuilt through actual earnings improvement and a recovery in the cycle, rather than through short-term analysis.

Since last week, earnings forecasts for chip companies have been gradually revised upward. This could be an important factor in restoring market confidence in valuations, which had weakened over the past several weeks. If earnings forecasts materialize and rise, current share price levels will look more attractive. The analysis suggests that valuation normalization alone has the potential to push prices well above current levels. Ultimately, valuation recovery through earnings improvement is expected to be the key driver of share price gains.