Key Takeaways
- Memory remains in short supply, with SK Hynix's record earnings highlighting the ongoing demand driven by AI.
- Broadcom's USD 63 billion financing deal indicates that infrastructure expansion in AI is still robust.
- Investors must differentiate between those benefiting from AI spending and those financing it, as spending does not equate to profits.
Memory is Having Its Moment
SK Hynix, a South Korean manufacturer of memory chips, reported a staggering 328% increase in third-quarter revenue, reaching 104.6 trillion Korean won. The operating profit surged to 83.3 trillion won, resulting in an impressive 80% operating margin. The company has secured agreements with 14 customers that cover over half of its planned production for 2027 and 2028. The current memory shortage grants suppliers like SK Hynix significant pricing power, which boosts their earnings while simultaneously increasing costs for customers.
The Money Behind the Machines
Broadcom, a US chipmaker, specializes in AI processors and networking equipment. Recently, a consortium including Bank of America, Citi, Morgan Stanley, and Blackstone announced a USD 63 billion financing package to purchase Broadcom equipment for Anthropic, the developer of the Claude AI assistant. This financing structure involves a separate vehicle that will acquire the hardware and lease it to Anthropic, with deliveries expected from 2027. This arrangement underscores the importance of financing in sustaining AI expansion, while also introducing financial risks associated with Anthropic's upcoming IPO.
Risks: The Bills Can Outlast the Boom
While memory shortages are currently advantageous for suppliers, they are not permanent. New capacity or reduced demand could lead to lower prices and margins. AI developers must generate sufficient revenue to cover rising computing costs, and if specialized chips depreciate faster than anticipated, the guarantees provided by suppliers could become burdensome.
Investor Playbook
Investors should:
- Monitor memory prices and long-term orders rather than solely focusing on quarterly profits.
- Evaluate AI developers' revenue growth in relation to their computing commitments and cash generation.
- Be cautious of portfolio concentration that relies heavily on the same AI infrastructure spending cycle.
The Boom is Not the Return
Investors need to be more selective despite the ongoing AI buildout. SK Hynix exemplifies how shortages can lead to exceptional profits, while Broadcom illustrates how substantial orders can be facilitated through financing. As production increases, memory shortages may ease, potentially lowering costs for AI developers but also diminishing the pricing power of current suppliers. Ultimately, the sustainability of value creation hinges on whether customers are willing to pay for the services supported by cheaper computing.