DeepSeek's New Model Reduces High-Bandwidth Memory Needs, SK Hynix and Samsung Shares Fall Friday
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Shares of SK Hynix and Samsung Electronics fell 2.2% and 3.5% after DeepSeek's latest AI model reduced the amount of high-bandwidth memory required, casting doubt on demand strength. This undermined a recent rebound following a July sell-off. Fund managers view the development as a short-term setback, but the decline suggests recovery will be uneven. Ha Seok-geun of Eugene Asset Management noted the model may raise near-term demand concerns, but new models from Meta and OpenAI could boost actual AI usage. South Korean retail investors have sold approximately $10 billion of these stocks this month, while foreign inflows have increased. Valuations remain low: Samsung trades at 2.7 times book value and SK Hynix at 5 times, versus 11 times for the Philadelphia Semiconductor Index. Both stocks are over 25% below historical highs, with volatility near pandemic and 2008 crisis levels. Analysts expect continued volatility but note that cheaper AI may drive greater adoption long-term.
Source report
Bloomberg — Fund managers who had recently bought back into South Korean memory maker stocks were dealt another blow as DeepSeek's latest AI model cast doubt on the strength of demand.
On Friday, shares of SK Hynix and Samsung Electronics fell 2.2% and 3.5%, respectively, undermining an initial rebound following a sharp sell-off in July. DeepSeek stated it has reduced the amount of high-bandwidth memory required for its AI models, exacerbating market concerns about tech stocks while expectations of U.S. interest rate hikes also added pressure.
Market Sentiment and Recovery
Previously, sentiment toward these two chip giants had improved, driven by:
- Sustained spending from major tech companies
- Low valuations
- Strong earnings
- Generous shareholder returns
Although most investors view DeepSeek's latest developments as a short-term setback, the recent decline suggests that the recovery will not be smooth sailing.
Ha Seok-geun, Chief Investment Officer at Eugene Asset Management, said DeepSeek's new model may raise concerns about a near-term slowdown in semiconductor demand. However, new models from companies such as Meta Platforms and OpenAI "will have a greater impact on industry fundamentals by boosting actual AI usage and semiconductor demand."
Retail and Foreign Investor Activity
Earlier this year, South Korean retail investors drove a frenzied rally in Samsung and SK Hynix shares, but this was abruptly reversed amid AI skepticism. They are rapidly exiting leveraged ETFs linked to chipmakers, having sold approximately $10 billion worth of these two stocks this month. The reduction in retail trading has attracted some foreign capital inflows, which had been net sellers so far this year.
Valuation Perspective
Isaac Tong, Senior Investment Director at Aberdeen Asia Income Fund, noted that views on South Korean memory chip makers are more positive than those for other segments of the semiconductor industry. Based on price-to-book and price-to-earnings valuations, "these stocks look cheap, especially compared to global peers."
| Metric | Samsung | SK Hynix | Philadelphia Semiconductor Index | |--------|---------|----------|----------------------------------| | Price-to-Book Value | 2.7x | 5x | 11x | | Forward P/E Ratio | ~4x | ~4x | 19x |
Volatility Concerns
However, both stocks remain more than 25% below their historical highs, and investors remain uneasy about the intense volatility triggered by daily news and position adjustments. Although volatility has eased somewhat, it remains close to peak levels seen during the pandemic and the 2008 financial crisis.
Matthew Tuttle, CEO of Tuttle Capital Management, pointed out that these stocks will remain volatile, and most investors can achieve similar returns through other means with lower volatility.
Despite deleveraging and regulatory measures aimed at restoring calm, daily swings exceeding 5% remain common for Samsung and SK Hynix.
Yoon Jung-in, Global CEO of Fibonacci Asset Management, said that given strong fundamentals, foreign investors may return once volatility significantly declines. News related to DeepSeek could bring "sentiment-driven pressure rather than a sustained sector sell-off," and in the long term, "cheaper AI may drive greater adoption, offsetting efficiency gains."
Source: Bloomberg
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