The 2nd biggest IPO in history is happening under your nose and it has created a unique buying opportunity in memory stocks.
SK Hynix is listing its ADR on the Nasdaq and offering shares to institutional investors. What many have missed is the giga size of $26bn, which would have made it the 2nd largest IPO of all time, after SpaceX. As we saw, markets traded down into the SpaceX IPO. This is mechanical, as funds buying into the offering need to sell other shares to make room.
What is unique about the SK Hynix ADR is that the funding sources are narrow and obvious: Korea-listed SK Hynix as well as Micron, Sandisk, Kioxia, and other similar memory names. The greatest pressure would be on Korea-listed SK Hynix, and my work suggests it could have been up to 20-25% of ADV per day since the offering was announced. Note that foreigners net sold Korean shares for 13 days in a row since the offering was announced, which helps confirm these flows. My sharp friends and I have been searching for the last week to explain the extreme sell-off in memory stocks, as while it felt natural for there to be a cleansing of froth amidst the rolling bull market in AI stocks we’ve seen since last year, it also felt unusually aggressive.
This means it is quite possible $15-20bn of memory stocks have been sold into a narrow exit door, which explains their stunning declines, but also setting up the deck for reversion once these flows cease. You can’t forget that memory is the most important capex ingredient for AI, and everything points towards greater memory demand as LLM can more used, with bigger models and longer context windows. As the offering was over 7x oversubscribed, which is surprising for such a large secondary offering, it is probable that funds oversold and are now underexposed and will have to buy back once allocations are known during the trading day Thursday (likely in the afternoon).
Of course, these flows lined up with exogenous factors that exacerbated the sell-off: frothy and overextended positioning, fears around memory efficiency gains, glimmers of the war restarting, Warsh coming in and being subtly hawkish. All of this came after SpaceX and the end of Q2 rebalance sucked out a lot of flows, which had made the market more fragile. After the stunningly good MU print, I was confused at how poorly it was trading, but now in hindsight it makes sense that is when the institutional VWAPs began. It is logical they would take advantage of the liquidity and demand created post-print to begin exiting in advance of the share offering, and as the negative factors accumulated, they got more aggressive on the offer to try to beat each other out.
The offering is more than 7x oversubscribed: $26bn x 7 = $182bn. This does not mean that $182bn of memory stocks were sold, but there is some relationship between the amount that funds submit for, and the room they need to create. Especially for a secondary offering where it would be more normal to get better allocations versus a hot IPO where getting close to nothing is to be expected. The greatest amount of pressure would have been on SK Hynix (given the ADR will likely trade at a premium), which appears to have then created downwards momentum in Korea, which has been very leveraged, and already seeing other negative factors such as margin increases for retail trading accounts, and rumors of market negative government actions such as unrealized capital gains taxes (which I view as unlikely).
If $15-20bn in the stocks were sold, that is a huge amount of flows to be hitting a few stocks, even if they are large in market cap. As I have explored in a past post about the right tail QQQ leaps, in the current market paradigm, even if market caps are large, free floats are deceptively small as passive flows have crowded them out.
On the efficiency gains, I don’t have any particular insight into the claims although it is very possible they are true. The reality is that efficiency gains around memory are being constantly made. This is not a binary where any efficiency gains mean the end of the trade, rather you can view it as the way that extremely undersupplied buyers of memory are coping with a difficult situation. So even with constant efficiency gains, the situation remains undersupplied, and has a high probability of staying undersupplied. If you look at the memory supply/demand model created by my brilliant friend @AlexCorrino, who has gone deep on these technical nuances, there are good odds the supply deficit will widen much further over the coming years, despite assumptions of significant efficiency gains.
Thus it became an excuse to sell, as memory was already acting very badly due to the pre-ADR mechanical flows, and then when the rumors hit, it created a setup where everyone felt like the efficiency gains were a big deal because the stocks had been acting so bad, and then sellers with different motivations were competing aggressively on the way out.
It was a perfect storm, and it was a perfect storm that you are now poised to benefit from. Generally, these mechanical flows wash out stocks and set them up for reversion, because the baby was thrown out with the bathwater. In this case it is likely there was overselling so those funds will have to buy shares back. And many other holders have sold, and knowing this thesis will give them the confidence to buy it back. It is also probable that some funds that were aware of these flows shorted or sold memory stocks as a trade into that, and will have to buy them back as well.
It’s a good setup, and while I can't say that prices will immediately make new highs now, it feels like a strong and defensible entry point into one of the most important trades of the year, an opportunity that does not come around often. Build medium-to-long term positions and be patient, I suspect it will be rewarding.
Disclaimer:
This is not financial or investment advice, it is not personalized to you, and it does not account for your objectives, risk tolerance, or situation. Nothing here is a recommendation, solicitation, or offer to buy or sell any security, private investment, or related asset, and nothing creates an advisory, fiduciary, or client relationship. The author holds positions in some of the companies discussed here. Positions can change at any time without notice, and there is no obligation to disclose, update, or correct them. The author is not paid by, and has no affiliate or sponsorship relationship with, any company mentioned. Assume a real, built-in conflict of interest, assume the content may be self-serving, and read it that way. Do your own work, check the primary sources, and consult your own licensed financial, legal, and tax professionals before you act on anything. Any decision you make is yours alone and made at your own risk.