Bernstein: SK hynix’s third-quarter DRAM price increase beats expectations: How can capacity expansion coexist with a prolonged shortage?

Why did third-quarter results beat expectations while net profit fell?

In the third quarter of 2026, revenue was 104.615 trillion won, up 31.9% quarter on quarter and 6.7% above market consensus. Operating profit was 83.334 trillion won, up 37.6% quarter on quarter and 8.4% above consensus.
The main driver was a quarter-on-quarter increase in the DRAM average selling price in the high twenties, exceeding Bernstein’s earlier forecast of 20.1%. Server DRAM rose to 56% of DRAM revenue and was the main source of revenue growth.
Net profit was 39.776 trillion won, down 57.6% quarter on quarter and 34.4% below market consensus, mainly due to a valuation loss on the KIOXIA stake. Operating margin rose to 79.7% quarter on quarter, showing that core operating profitability moved differently from net profit.

The company guided for DRAM bit shipments to grow in the mid-twenties quarter on quarter in the fourth quarter, well above Bernstein’s previous forecast of 5.5%. The firm believes this could come from a faster ramp-up of HBM4 and SOCAMM2 for Rubin.
HBM4 entered mass production in the third quarter. Bernstein expects it to grow rapidly in the fourth quarter and surpass HBM3E. Related negotiations for 2027 have also been completed, with revenue and profit expected to grow significantly year on year. The firm believes conventional DRAM will remain more profitable, but HBM margins are expected to narrow the gap significantly.
Third-quarter graphics DRAM revenue, supported primarily by HBM, was approximately 8.5 billion US dollars, slightly above the firm’s export-data tracking model forecast. NAND bit shipments fell slightly over the same period.

SK hynix believes growth in AI investment will sell out its DRAM and HBM capacity through 2029, and that demand will exceed supply across the memory market through 2030. The company expects supply constraints to limit DRAM and NAND bit growth in 2027 to the mid-twenties and high teens, respectively.
More than 50% of capacity for 2027 and 2028 is already covered by long-term agreements, but Bernstein has yet to see significant prepayments and therefore believes its investment thesis still requires a fundamental supply shortage.
Supply is also expanding: the company expects capital expenditure to increase significantly in 2027. Its full-year 2026 capital expenditure guidance remains in the high range of more than 40 trillion won, implying fourth-quarter spending will rise further from the record third quarter.

The company expects shareholder returns of approximately 100 trillion won in 2026, including more than 30 trillion won in dividends and more than 60 trillion won in buybacks, above Bernstein’s expectations. The board has approved a third-quarter dividend of 14 trillion won and buybacks of 20 trillion won.
The future return target remains above 50% of cumulative free cash flow over three years, which Bernstein believes may disappoint some investors. The firm maintains its Outperform rating and 2.7 million won price target, implying approximately 101% upside from the 27 October closing price of 1.341 million won.
The price target is based on 5.1 times forecast earnings per share for the 5th through 8th quarters ahead. Bernstein believes the recent share-price pullback has lowered investor expectations, but an early end to the favorable pricing environment due to weaker demand or increased supply is the main downside risk to its price target.