From boon to burden: AI spending woes leave Kospi among worst-performing major indexes

[NEWS ANALYSIS]

The fortunes of Korea’s memory chipmakers increasingly dictate those of the entire Kospi — a boon in good times, but a liability now as doubts over AI spending mount.

Entering October, the Kospi wiped out about 1.05 quadrillion won ($792 billion) in market value, or 19 percent, marking the steepest drop among major Asian indexes as of Tuesday’s close.

The dramatic reversal from the first half coincides with a string of setbacks that have raised doubts over how long the AI infrastructure boom driving memory chip demand can be financed, including a credit scare at U.S. AI cloud provider CoreWeave and the collapse of a planned $5 billion initial public offering (IPO) by a data center firm in Australia.

Such concerns have had an outsize impact in Korea, where Samsung Electronics and SK hynix — memory-chip giants whose earnings are particularly sensitive to supply-and-demand swings — account for nearly half the Kospi’s market capitalization.

Nasdaq, for instance, has declined 1.6 percent while Taiwan’s benchmark Taiex has fallen 3.44 percent over the same period.

It has become increasingly common for good news to do little to lift Samsung Electronics and SK hynix shares, while negative developments rattle investors and subsequently impact the Kospi. 

Analysts attribute the pattern to high expectations already being priced into the shares, as illustrated by the market’s reaction to Samsung Electronics’ preliminary third quarter results on Oct. 9. 

It became the first technology company in history to post quarterly operating profit exceeding 100 trillion won in the guidance, but its shares dropped 2.42 percent. 

Global AI setbacks rattle Kospi

At the center of the latest turmoil was financial distress at Nasdaq-listed cloud-computing company CoreWeave.

Yields on CoreWeave bonds due in 2032 climbed to 15 percent, according to a chart posted on Oct. 13 on X by Chamath Palihapitiya, CEO of an investment firm Social Capital. The company’s shares plunged more than 15 percent the following day from the previous closing price.

The bond-market rout underscored investor concerns over CoreWeave’s ability to finance its aggressive expansion, with fears spreading across the AI industry. Those concerns spilled over into Korea’s stock market, where the Kospi plunged 5.46 percent on Oct. 13, led by a 10.09 percent drop in SK hynix and a 7.39 percent decline in Samsung Electronics.

The stronger-than-expected September consumer-price index (CPI) reading added to concerns that the Federal Reserve may make an additional rate hike before the end of the year. The headline CPI increase reached an annual rate of 3.7 percent, accelerating from 3.4 percent in August.

A similar reassessment of the risks surrounding debt-funded AI infrastructure has also weighed on investor appetite for data center investments, with concerns extending beyond the United States.

Firmus, an Australian data center operator backed by Nvidia and Blackstone, scrapped plans for a $5 billion IPO earlier this month amid tepid investor demand.

Had it proceeded as planned, the offering would have been the second largest in Australian history. Instead, amid weak demand and investors’ increasingly selective approach, the company is pursuing a private fund-raising round that it hopes will pave the way for a Nasdaq listing, Reuters reported.

The developments have prompted investors to reassess whether the AI boom can deliver returns quickly enough to justify the massive investments behind it, leaving Korean chipmakers vulnerable to any shift in sentiment.

“The downside risks hadn’t been priced in when Samsung Electronics and SK hynix shares peaked in June, while the next five years of expected gains already were,” said Lee Joo-wan, a semiconductor analyst and former researcher at SK hynix. “From here, I think any negative developments will be reflected in their share prices as they emerge.”

A double-edged business model

The memory chip industry’s business model also leaves the Korean market more vulnerable to swings than markets dominated by chipmakers in other segments of the semiconductor industry.

Memory-chip makers manufacture and sell their own products, reaping outsize profits when demand is strong but absorbing losses when it weakens. Foundries manufacture chips for customers, while fabless companies outsource production, sparing both the need to bear the full cost of manufacturing capacity.

“Memory is far more cyclic than other parts of the semiconductor industry, such as foundry and fabless companies,” Lee added. “A downturn can be devastating for memory-chip makers, while foundries and fabless companies tend to face milder swings.”

Samsung Electronics and SK hynix posted net profit margins of 41.8 percent and 118 percent, respectively, in the second quarter, compared with 55.6 percent at TSMC and 31.28 percent at Dutch semiconductor equipment maker ASML Holding.

The potential entry of a major new player into a capital-intensive industry, where only a handful of memory-chip makers survived years of brutal competition, has added to investor concerns.

China’s CXMT is advancing its memory-chip technology. In early October, the company reported “key progress” on a new cell architecture designed to increase memory density and said it plans to launch a server-memory product based on the design by the end of the year.

“Memory-chip makers went through a brutal price war about 20 years ago, driving out companies that couldn’t afford to sustain losses rather than those that fell behind technologically,” said Jang Geun-hyuk, a senior research fellow at financial think tank Korea Capital Market Institute, warning that a new competitor could intensify price competition and erode incumbents’ pricing power and profit margins.

On top of diversifying the country’s key industries, Jang said a calmer investor mood would help temper swings in the Kospi.

As of the end of September, semiconductor stocks accounted for 10.4 trillion won of the 33.4 trillion won in outstanding margin loans at Korean securities firms, according to NICE Investors Service. Samsung Electronics and SK hynix alone accounted for 9.2 trillion won.

“Historically, margin borrowing has been relatively low in blue chip stocks like Samsung Electronics and SK hynix,” Jang said. “But capital has become heavily concentrated in these stocks, setting the stage for a clash between supply and demand as individual investors have piled in over an extended period.”

BY JIN MIN-JI, LEE JAE-LIM [[email protected]]