Q2 loss narrows amid robust AI demand, chip recovery

South Korean chipmaker SK Hynix posted a second-quarter operating loss of 2.88 trillion Korean won ($2.24 billion) on Wednesday as demand for memory chips remained sluggish.

SK Hynix said the weak memory chip market is on the road to recovery amid robust artificial intelligence demand, which resulted in a smaller second-quarter operating loss.

The quarterly losses were narrower than the 3.4 trillion Korean won in the previous quarter which ended in March, and compared to a 4.2 trillion won profit from a year ago.

That’s compared with expectations for a 2.7 trillion won operating loss, according to Refinitiv estimates, weighted toward analysts that are more consistently accurate.

Memory chips are crucial to train large-language models such as ChatGPT. Such chips enable generative AI models to remember details from past conversations and user preferences in order to generate humanlike response.

“Amid an expansion in generative AI market, which has largely been centered on ChatGPT, demand for AI server memory has increased rapidly,” the company said in its earnings report on Wednesday.

“In the future, the AI related semiconductors or the DRAMs, are going to have a big impact,” Anthony Sassine, senior investment strategist at KraneShares told CNBC Wednesday. “These are expected to grow between 35% to 40%. We’re going to see a lot of demand from that and that’s probably underestimated.”

“I think ChatGPT and generative AI this year kind of opened my eyes to and made that realization happened sooner than expected. And now we’re trying to play catch up and I think SK Hynix will benefit from that,” said Sassine.

Shares of SK Hynix were trading 1.23% lower on Wednesday morning in Asia.

Revenue increased in the second quarter to 7.31 trillion Korean won, up 44% from the first quarter of 5.08 trillion Korean won.

As a result, sales of premium products such as HBM3 and DDR5 increased, the company said.

“Having passed the trough in the first quarter, the memory semiconductor market is seen to have entered the recovery phase,” said Kim Woohyun, vice president and CFO of SK Hynix, in the earnings report.

SK Hynix said in October it will be cutting its capital expenditure by half in 2023 to lower production after posting a 60% decline in third-quarter profit from weak memory chip demand. Samsung and Micron have also announced capital expenditure cuts to lower production.

Smartphone and PC makers are struggling with excess inventories of memory chips after stockpiling such chips during the pandemic-induced boom. As inflation soared, consumers have been buying less of these goods due to rising inflation, prices for memory chips have fallen.

The company said sales of both DRAM and NAND flash memory products increased in the second quarter, and higher average selling price of DRAM largely contributed to revenue growth.

“Although the price for general DRAM products such as DDR4 continued to decline on sluggish PC and smartphone demands, DRAM blended average selling price rose in the quarter, offset by increased sales in high-end products used for AI servers,” the company said.

The South Korean memory chip maker expects the demand for AI memory to “continue to stay robust” and a “clearer effect of production reduction by memory companies” is expected.

“The company’s stance on consolidated investment, which is to reduce that by at least 50% compared to 2022, remains unchanged,” said Kim.

Sassine said he expects memory chip prices to go up this year.

“So we’ve had declining prices for DRAM and NAND for last year and half [of this year], and that inventory is expected to bottom out. We should start seeing these prices go up in probably in Q3 or Q4, and that should help SK Hynix’s major business as of now,” said Sassine on CNBC’s “Squawk Box Asia” Wednesday.

SK Hynix will benefit from the AI boom, said Sassine.