SK hynix's first-quarter results reinforce the "super storage cycle" view

Overview

This report is Morgan Stanley's review of SK hynix's 1Q26 results. Its core conclusion is that the "super storage cycle" remains intact: rapidly rising prices, strong HBM demand, improved visibility from long-term supply agreements, and declining inventories keep SK hynix well positioned in the AI memory supply chain.

Core views

The report maintains a positive view, arguing that the market should not focus only on the current quarter but should look ahead to earnings recovery in the second half. As memory prices rise rapidly, margin expansion and improved capital returns should offset concerns over higher capital expenditure. Morgan Stanley expects its earnings forecasts to be above market consensus, and with 2026 consensus EPS already revised up 42% since the start of the year, further earnings upgrades could still drive the stock higher.

Analysis framework

The analysis mainly focuses on results versus market expectations, HBM supply and market share, long-term supply agreements, inventory across end markets, capital expenditure plans, valuation, and target price. Valuation uses a residual income model, combined with the Morgan Stanley ModelWare framework and Refinitiv consensus data.

Methodology notes

• Valuation methodsResidual income valuation model

  Derives the target price based on cost of equity, terminal growth rate, and future earnings.

  The report's base-case target price is derived from a residual income valuation model, assuming a cost of equity of 11.5%, including a 5% risk-free rate, a 6.5% risk premium, a beta of 1.0, and a terminal growth rate of 3%.

• RatingMorgan Stanley relative rating system

  Overweight means expected risk-adjusted total return over the next 12 to 18 months is above the average of the covered industry.

  The report uses relative ratings such as Overweight, Equal-weight, Not-Rated, and Underweight, which are not equivalent to traditional buy, hold, and sell ratings.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• SK hynix (000660.KS)

  Core covered name

  Strengths

  HBM4 is ramping as planned, and leadership in HBM3e/4 share is likely to continue; LTAs improve demand and profit visibility; rising memory prices are driving margin expansion.

  Weaknesses

  Capital expenditure will rise significantly in 2026, and intensifying competition may affect the quality of DDR5- and HBM-related earnings.

  Comparison

  The report believes the current share price is still being valued as if a cyclical downturn were ahead, without fully reflecting the sustainable growth from AI demand and LTAs.

  Risks

  Weaker-than-expected end demand, overinvestment on the supply side, and still-high inventories among cloud and Chinese mobile customers could all weaken the upside case.

Key data

• Stock ratingOverweightThe report maintains an Overweight rating.
• Industry viewAttractiveThe view on the covered industry is Attractive.
• Target priceW1,700,000Target price history shows the target was raised to W1,700,000 on April 19, 2026.
• Closing priceW1,223,000As of April 22, 2026.
• Target price upside39%Calculated based on the target price and closing price.
• Operating profitW37.6trThe report describes this as another record high, with an operating margin of 72%, up 96% QoQ and 405% YoY.
• 2026e EPSW300,498Estimated by Morgan Stanley ModelWare.
• 2026e revenueW335,034bnEstimated by Morgan Stanley ModelWare.
• 2026e EBITDAW295,353bnEstimated by Morgan Stanley ModelWare.

Impact & implications

The report argues that SK hynix's investment case is shifting from that of a traditional cyclical stock to AI-driven structural growth. Tight HBM supply-demand conditions, LTAs locking in demand, and declining memory inventories give the company better earnings visibility than in prior cycles; if prices continue to rise and consensus earnings continue to move up, the current valuation may still underestimate its earnings leverage.

Risks

• End demand is weaker than expected.
• DDR5 competition intensifies, leading to overinvestment on the supply side.
• Inventories at cloud customers and Chinese mobile customers remain elevated.
• A sharp rise in capital expenditure may depress free cash flow or capital returns.
• If leadership in HBM market share is affected by competition, room for earnings upgrades may be limited.

What to watch

• Whether the HBM4 ramp proceeds as planned.
• Whether HBM3e/4 can maintain share leadership amid intensifying competition.
• The contribution of long-term supply agreements to visibility on pricing, volume, and profits.
• The pace of inventory digestion across servers, PCs, mobile phones, and NAND.
• The scale of 2026 capital expenditure, node migration, and the pace of upfront infrastructure investment.
• Whether 2026 consensus EPS continues to be revised upward.