Valuations of South Korean chip stocks have reached inexplicable levels, leaving them vulnerable to sharp falls on minor setbacks, said an analyst who has a "sell" rating on both SK Hynix and Samsung Electronics. Morningstar Inc.'s bearish report attracted little attention when it was released more than a month ago, but it has gained renewed attention amid growing scrutiny of tech giants' big investments in artificial intelligence.
The shift in market sentiment caused wild swings in global technology stocks and exposed the shortcomings of one of the hottest investments this year.
"Investor confidence is very unstable and very nervous," said Jing Jie Yu, an equity analyst at the research firm. "When expectations are so high, all the drivers and catalysts have to be just right for the share price to rise further - and it's easy to disappoint."
Shares of SK Hynix and Samsung suffered their biggest one-day losses in months last week after pushing the Korea Composite Stock Price Index (KOSPI) up more than 70% this year. While shares have mostly recovered since then, the drop has unnerved investors who had previously piled into South Korea's two largest stocks by market capitalization.
The latest round of turmoil comes as SoftBank Group sells all of its Nvidia shares, adding to the unease among investors already concerned about rising valuations in technology stocks. Earlier this month, Michael Burry's Scion Asset Management disclosed its bearish bet on Nvidia, which had previously issued veiled warnings about a market bubble. Data compiled by Bloomberg show that foreign investors have reduced their stake in SK Hynix to the lowest level since May.
Foreign investors have been selling SK Hynix stock
While SK Hynix and Samsung have benefited from a surge in demand for high-bandwidth memory chips driven by artificial intelligence, the long-term prospects for such spending are far from guaranteed, Yu said.
"The intensity of investment in AI in hyperscale data centers is very, very high today, and we are concerned that this intensity will continue," the Singapore-based analyst said. OpenAI's investment commitments have driven up its share price over the past month, but how "unbreakable" those commitments are is uncertain, he said.
Still, overall market sentiment toward artificial intelligence remains positive, as concerns about missing out on this historic technological revolution are overridden by worries about a bubble. Since Morningstar downgraded SK Hynix and Samsung in September and October, respectively, the two companies' shares have risen more than 80% and 20%, respectively.
Although the stock price has soared, it is still trading at a low price due to its previous low valuation. Samsung's stock price has risen 94% this year, and its current price-to-earnings ratio is 11 times; SK Hynix's stock price has risen 61% in October, and its current price-to-earnings ratio is only 8 times. By comparison, the average price-to-earnings ratio for major U.S. chipmakers is as high as 27 times.
However, Mr. Yu said, "At the current price, it is difficult for investors to find reasons to buy, or it is easy to find reasons to sell." He suggested that "in this volatile and overly optimistic market, risk-averse strategies should be adopted."
Prior to joining Morningstar, Mr. Yu worked at River Valley Asset Management, Bank of Singapore and Santa Lucia Asset Management.