From South Korea to Japan and China, the world's largest memory chipmakers are working this week to allay concerns that spending on artificial intelligence is outpacing future demand. How they navigate their upcoming earnings reports and investor inquiries will help shape market direction and shed light on the broader outlook for the AI industry.

On Wednesday, SK Hynix will kick off a series of earnings disclosures critical to the nearly trillion-dollar memory chip market, followed by Samsung Electronics, Japan's Kioxia Holdings, and China's rapidly emerging CXMT. Together, these companies command a market capitalization exceeding $2 trillion, and the components they supply account for one-third of the data center expenditures by major tech firms.

On the surface, all four companies are expected to report stellar results - including exponential growth in both revenue and profit - a consequence of semiconductor shortages that are projected to persist for years.

Yet, investors are currently more cautious than at almost any point since OpenAI's 2022 launch of ChatGPT, which garnered global acclaim. SK Hynix and its peers are contending with a market focused on rising borrowing costs and growing anxieties that massive capital expenditure plans may ultimately outstrip future returns. 

Oracle Corporation Terms

Over the past few weeks, investor sentiment has grown increasingly anxious as Oracle invoked a *force majeure* clause in response to delays at a data center project in New Mexico - a move that has caused bond spreads to widen across the entire sector. Meanwhile, yields on bonds issued by data center specialist CoreWeave have surged in tandem with a sharp decline in the company's share price. Firmus Grid, a firm backed by Nvidia, has scrapped plans for an Australian stock market debut - a move that had been envisioned as a gateway for Australia into the era of artificial intelligence. Furthermore, Microsoft's withdrawal from a data center project involving the UK-based startup Nscale has cast doubt on that company's own planned initial public offering (IPO).

"Memory is the best real-time indicator of demand for artificial intelligence," says Billy Leung, an investment strategist at Global X Management. "Prices fluctuate daily - that's something you can't fake."

He notes that while these findings may not settle the ongoing debate over an "AI bubble," they should help clarify whether this boom is underpinned by genuine, concrete orders.

The financial results from Asian chipmakers are being released alongside the earnings reports of some of the world's largest investors in artificial intelligence, including Alphabet Inc., Microsoft Corp., and Amazon.com Inc.

Collectively, these disclosures serve as a litmus test for the confidence of AI technology providers - specifically, whether they believe the massive capital poured into data centers and computing equipment will yield sufficient returns to justify the capacity expansions currently being undertaken by hardware manufacturers. The concern is not that demand for AI will vanish, but rather that revenue growth may struggle to keep pace with the costs of building the infrastructure required to support AI.

As chip shortages create challenges across various sectors - from automotive to smartphones - the four major Asian memory chip manufacturers have seen unprecedented price increases. A sustained surge in both prices and orders would confirm that deep-pocketed clients, such as Alphabet and Meta Platforms Inc., are pressing ahead with their expansion plans, even in the face of mounting skepticism. 

Investor expectations

However, according to Dave Mazza, CEO of Roundhill Investments, the modest price-to-earnings (P/E) ratios of these companies suggest that investors have already priced in the expectation of a future economic downturn, leading them to pay less attention to the most recent quarter's results. "The numbers themselves are almost beside the point," he remarked.

For investors with long memories, the uncertainty surrounding the bond and IPO markets evokes past "boom-and-bust" cycles, fueling concerns that the industry may be nearing a cyclical peak. Shares of both Samsung and SK Hynix have fallen by nearly half from their June highs.

Phillip Wool, head of portfolio management at Rayliant Global Advisors, noted that his fund remains invested in both companies, even though it locked in some profits prior to the recent sell-off. "The era of 'blind optimism' is giving way to a more rigorous examination of fundamentals," Wool said. "The days of making easy money in this sector are over."

Some analysts argue that the recent sell-off may be premature, pointing out that potential share buybacks, dividends, and other shareholder-return initiatives - expected in the coming months - could serve as catalysts for a rebound in stock prices.

Lee Jong-wook, an analyst at Samsung Securities, anticipates that share prices could recover to new highs by the second quarter of next year. Analysts at Macquarie believe the market is currently facing a structural shortage rather than an impending oversupply. Meanwhile, Peter Lee, an analyst at Citigroup, expects the memory "super-cycle" to last for nine years - longer than previously anticipated.

The global race for computing resources is generating massive profits for Samsung and SK Hynix; together, the two companies control approximately 60% of global revenue for dynamic random-access memory (DRAM) and over 80% of revenue for high-bandwidth memory (HBM). Jeff Kim of KB Securities projects that the two firms will generate a combined operating profit of 1,571 trillion won (approximately $1.2 trillion) between 2026 and 2027 - a figure roughly double their cumulative profit over the past 26 years. Mr. Jin stated that much of the anticipated growth is already reflected in existing orders. For South Korean chipmakers, more than 70% of their planned memory production for next year is already committed under five-year supply agreements with major tech companies, leaving less than 30% available for other customers, including smartphone and PC manufacturers.

This creates an opportunity for CXMT, which is aggressively expanding its legacy DRAM business with the goal of acquiring the technology needed to compete head-to-head with Samsung, SK Hynix, and Micron Technology. CXMT recently introduced a 4F² architecture designed to increase memory density, aiming to narrow the technological gap with its overseas rivals.

The situation to Kioxia

For Kioxia, a company focused on NAND flash memory, the spotlight is on its reluctance - thus far - to aggressively raise prices to capitalize on the surging demand for enterprise-grade solid-state drives (SSDs).

The Tokyo-based firm, which produces NAND flash through a joint venture with SanDisk Corp., is expected by analysts to see its operating profit for the September quarter jump more than 20-fold. Market attention is now focused on whether the company can secure long-term agreements to buffer itself against the extreme price volatility typical of the NAND flash market.

Long-term commitments, however, do not eliminate the risk of a slowdown in AI infrastructure spending - particularly if financing costs rise or customers struggle to generate sufficient returns on their investments. Nor do they guarantee that the current shortage won't eventually swing into an oversupply.

Mazza, of Roundhill, notes that concrete evidence of robust demand and disciplined capital expenditure would help buy some time.

"If the 'Big Four' software giants can show that their order backlogs are shrinking less than anticipated, then the debate over whether the memory market has peaked could be pushed back by a year," he says.

Source: Compiled from Bloomberg

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