Despite widespread opposition, sell Samsung Electronics and SK Hynix, Morningstar: Valuation has reached an inexplicable level

Bloomberg quoted Morningstar stock analyst Jing Jie Yu as saying that the valuations of South Korean chip stocks have reached an inexplicable level, making them susceptible to significant declines due to minor setbacks. Morningstar has rated Samsung Electronics (005930.KS) and SK Hynix (000660.KS) as "Sell."

Morningstar is the only major financial institution in the market to give both companies a "Sell" rating. Since Morningstar downgraded SK Hynix and Samsung in September and October, respectively, the stock prices of both companies have risen by over 80% and 20%.

Last week, SK Hynix and Samsung's stock prices recorded their largest single-day drop in months, after their prices had previously driven the Korea Composite Stock Price Index (KOSPI) to a cumulative increase of over 70% this year. Although the stock prices subsequently rebounded, the decline has made investors who had heavily bought these two largest South Korean stocks uneasy. The latest round of volatility was triggered by Japan's SoftBank (9984.JP) liquidating its Nvidia (NVDA.US) holdings for over $5.8 billion last month.

The Morningstar report, released over a month ago, did not attract market attention at the time, but as scrutiny of tech giants' substantial investments in artificial intelligence has deepened, the report has drawn renewed interest. Yu stated that investor confidence is very unstable and extremely tense. When expectations are so high, all driving factors and catalysts must align perfectly for stock prices to rise further, which can easily lead to disappointment.

Yu noted that while SK Hynix and Samsung benefit from a surge in demand for AI-driven high-bandwidth memory chips, the long-term outlook for such spending is far from guaranteed.

He mentioned that the investment intensity of hyperscale data centers (HDC) in artificial intelligence is very, very high, raising concerns about whether this intensity will continue. He said that in the past month, OpenAI's investment commitments have driven up its stock price, but how "unbreakable" these commitments are remains uncertain.

Despite the soaring stock prices, both stocks are still considered cheap due to their previous undervaluation. Samsung's stock price has risen 94% this year, with a current price-to-earnings ratio of 11 times; SK Hynix's stock price rose 61% in October, with a current price-to-earnings ratio of only 8 times. In contrast, the average price-to-earnings ratio of major U.S. chip manufacturers is as high as 27 times.

However, Yu stated that at the current price levels, it is difficult for investors to find reasons to buy or easily find reasons to sell. He suggested adopting a risk-averse strategy in this volatile and overly optimistic market