Micron (NASDAQ:MU) and SK hynix (NASDAQ:SKHY) are selling some of the most sought-after memory chips in the AI world, yet their stocks come with different valuations. Both are benefiting from booming demand and elevated memory prices, although their strengths within the market and the prices investors pay for their earnings create a much less obvious choice between them.
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American investors now have an easier way to own SK hynix following its July Nasdaq IPO. The initial enthusiasm sent SKHY substantially above its offering price, although the shares have since retreated about 29% from their post-IPO high.
Meanwhile, MU shares are up 208% this year amid soaring memory prices and exceptionally strong AI-related demand. However, the stock has become considerably more volatile since Micron reported its latest quarterly results, despite delivering another strong performance and outlook. After such a massive rally, expectations have climbed alongside the stock, leaving shareholders more sensitive to any indication that today’s extraordinary memory pricing environment may eventually become less favorable.
That brings us to one investor, known by the pseudonym Alpha Analyst, who believes comparing these companies requires looking beyond their seemingly inexpensive earnings multiples. Memory manufacturers can appear particularly cheap when rising prices are sending profits toward cyclical highs, meaning low earnings multiples can sometimes give investors a misleading picture.
“A low multiple at the top is not a steal,” Alpha Analyst warns, questioning whether today’s elevated memory profits make traditional valuation comparisons particularly useful. In his view, Micron trading near 12 times forward earnings does not automatically make the shares inexpensive compared with the broader semiconductor industry.
SK hynix, however, gives Alpha Analyst another valuation comparison that he finds considerably more compelling. “What does work for SK hynix is that it is trading at nearly half the valuations of Micron,” the investor explains.
Alpha Analyst doesn’t expect investors to erase that valuation gap anytime soon, despite the improved access through Nasdaq. “I very much expect the gap to stay more sticky than my expectation suggests,” the investor acknowledges, while still expecting some narrowing over a longer investment horizon.
More importantly, Alpha Analyst believes SK hynix’s cheaper valuation could provide greater protection if investors eventually become less willing to pay current multiples for memory stocks. “A relative trade bullish on SK hynix versus Micron definitely appears to be better cushioned if multiples correct,” the investor argues.
Valuation is not the only reason Alpha Analyst prefers SK hynix when comparing these two memory giants. The investor views SK hynix’s long-term supply agreements as better positioned to capture additional pricing upside, potentially allowing the company to benefit more if memory shortages continue driving prices higher. Micron’s agreements include both price ceilings and floors, providing greater certainty while potentially limiting some benefits from additional pricing increases.
Those considerations ultimately lead Alpha Analyst to rate Micron shares a Sell while giving SK hynix a Buy rating. (To watch Alpha Analyst’s track record, click here)
Alpha Analyst may see a clear winner between the two, but Wall Street sees less reason to choose sides. Both Micron and SK hynix earn Strong Buy consensus ratings from analysts covering their shares. More interestingly, Wall Street sees almost identical upside ahead, with Micron’s $1,560.74 average price target implying about 78% upside and SK hynix’s $245.50 target pointing to a nearly identical gain. (See MU stock forecast or SKHY stock forecast)
Disclaimer: The opinions expressed in this article are solely those of the featured investor. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.