Morgan Stanley has raised its earnings forecasts for Samsung Electronics and SK Hynix for next year but significantly lowered their target prices. The firm believes that while the memory semiconductor market will continue to thrive in the short term due to increased investment in artificial intelligence (AI), maintaining the current high profitability beyond 2028 may be challenging as new production facilities come online starting late next year.
On November 10, the financial investment industry reported that Morgan Stanley reduced SK Hynix's target price from 2.6 million won to 1.6 million won, a 38% decrease, in its report titled 'Memory Semiconductors - Key Issues After the U.S. Midterm Elections.'
Samsung Electronics' target price was also lowered by 19%, from 381,000 won to 309,000 won. The target price for Samsung's preferred shares was adjusted from 304,800 won to 247,200 won. However, Morgan Stanley maintained its investment rating of 'overweight' for both Samsung Electronics and SK Hynix.
Sean Kim, a Morgan Stanley analyst known for his warnings about the semiconductor industry's downturn, previously cautioned about a potential decline in the memory sector in his 2021 report titled 'Memory, Winter is Coming.' He also significantly lowered target prices for Samsung Electronics and SK Hynix in 2024 due to concerns over memory supply surplus.
In this latest report, Morgan Stanley highlighted concerns about the period after 2028. Kim stated, "The most critical debate in the current memory semiconductor market is whether we can avoid the 'earnings cliff' in 2028," adding that worries are growing about achieving and maintaining growth beyond 2028 rather than just next year's earnings.
Particularly, as new production facilities begin operations late next year, the increase in memory supply may coincide with a slowdown in the construction of AI data centers. Morgan Stanley anticipates that some data center construction plans will be delayed following the U.S. midterm elections, pushing back a project expected to be operational in 2028 to 2029, which is about 5 gigawatts (GW) in scale.
As a result, the global growth rate for new data center facilities is projected to drop from the previously expected 21% in 2028 to 9%, before recovering to 20% in 2029. The firm explained that as memory supply increases during the delay in data center investments, the current supply shortage may ease, putting downward pressure on semiconductor prices.
Additionally, the expansion of production capacity by Chinese semiconductor companies and intensified competition in the high-bandwidth memory (HBM) market are also seen as factors that could constrain long-term profitability. Consequently, Morgan Stanley lowered its forecast for SK Hynix's HBM operating profit margin for 2027-2028 from the previous 78-80% to about 70%. Samsung's HBM operating profit margin forecast was also adjusted down from approximately 80% to 65-72%.
Conversely, the short-term earnings outlook has improved. Morgan Stanley raised its operating profit forecast for Samsung Electronics by 9% and for SK Hynix by 13%. The 2028 operating profit forecasts for both companies were also increased by 10% and 1%, respectively.
Despite these upward revisions, the lowered target prices reflect the potential for memory semiconductor profitability to revert to historical averages after 2029. Morgan Stanley reduced its forecast for SK Hynix's average operating profit margin from 53% to 28% for 2029-2035.
Morgan Stanley noted, "Stock prices often move ahead of a company's fundamentals, and there is a risk that earnings forecasts will decline as supply catches up with demand and the pace of AI infrastructure development slows in the coming years."
However, the firm's top pick in the semiconductor sector has shifted from Samsung Electro-Mechanics to Samsung Electronics. This change is attributed to Samsung's recovery of market share in the HBM sector and its ability to generate profits from non-semiconductor businesses, positioning it relatively favorably during a downturn.
According to a forecast cited in the report from TrendForce, Samsung Electronics is expected to increase its HBM market share to about 39% next year, surpassing SK Hynix's anticipated 37% share.
Morgan Stanley concluded, "While AI is bringing structural changes to the memory semiconductor industry, the memory sector still retains cyclical characteristics. In the latter part of the cycle, larger companies with solid financial structures will be relatively better positioned."
* This article has been translated by AI.
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