HYBE, SM, JYP and YG Struggle on Stock Market Amid Growth Fears

HYBE shares dropped to 136,500 won, around a 100 USD, during trading on Nov. 4. That was the company's lowest price in a year.

It was the latest low point in a slide that has lasted nearly a year across South Korea's four biggest K-POP companies: HYBE, SM Entertainment, JYP Entertainment and YG Entertainment. The stock market has grown cautious about their growth. Investors are asking whether these companies can keep their biggest acts earning while also finding new artists to take their place.

The swings have been sharp. On Nov. 4, HYBE and SM Entertainment closed down 12.4% and 9.0%, respectively. The following day, the two stocks bounced back with gains in the 6% and 8% range. At the close on Nov. 6, HYBE was up 1.59% from the day before, while SM Entertainment slipped 0.51%.

Third-quarter earnings triggered the latest round of stock market volatility. On paper, HYBE's revenue and operating profit for the third quarter of this year were both record highs. However, its net income fell nearly 90% from the previous quarter, and that rattled investors.

The main culprit was foreign exchange losses. As the won-dollar exchange rate dropped, the foreign currency HYBE holds declined when converted into won. With the exchange rate still trending down, currency fluctuations have emerged as a significant risk for its earnings and stock price.

SM Entertainment's numbers were weaker across the board. Both revenue and operating profit fell from the third quarter of last year, and the company swung to a net loss of 1.1 billion won (812,000 USD). SM Entertainment gave a simple explanation. "Our album activity decreased as we carried out concerts," the company said.

The longer-term picture is even more concerning. All four companies have seen their stocks fall throughout the year, and they have done worse than the market average. HYBE has been sliding steadily since February. YG Entertainment and SM Entertainment have been falling since August last year, and JYP Entertainment since November last year. Compared with each company's peak, the closing prices on Nov. 6 are down 50% to 60%.

The biggest problem is weakening expectations for future earnings. HYBE's stock has dropped more than 64% since February, when news of a BTS comeback broke. Investors refer to this as a "peak-out" worry, meaning they fear the company's earnings may have already reached their peak.

The market's main concern is that HYBE has no clear successor to BTS in terms of commercial impact. The company has several core groups, including SEVENTEEN, ENHYPEN and KATSEYE. Still, it is not easy for any single group to match the impact of BTS. The timing adds to uncertainty. BTS will keep touring the world through March next year, and it remains unclear when the group will release its next full-group album.

Brokerages have also lowered their outlooks too. Samsung Securities cut its target price for HYBE to 235,000 won (173 USD), about 16% below its previous target of 280,000 won (206 USD). Hana Securities lowered its target by 10%, from 300,000 won (221 USD) to 270,000 won (199 USD). In January, the two firms had set targets of 410,000 won (302 USD) and 440,000 won (324 USD), respectively.

JYP Entertainment and YG Entertainment are falling for similar reasons. JYP Entertainment's flagship groups, TWICE and Stray Kids, are both expected to face gaps in their activities. When TWICE reached its contract renewal period, members Jeongyeon, Chaeyoung and Jihyo left the company to focus on individual activities. Full-group activity is not expected to look the way it did before.

Stray Kids faces a different kind of break. Some members are set to begin their mandatory military service, which all able-bodied South Korean men must complete. Most of the group's members will have to enlist within the next five years.

YG Entertainment has no artist with enough influence to follow BLACKPINK. It is also unclear when BLACKPINK will return as a full group. Since wrapping its world tour in January, the members have focused on solo work. Each member is signed to a different agency for individual activities, so their solo income does nothing for YG Entertainment's earnings.

SM Entertainment's challenge is star power. Its individual acts are seen as less influential than the biggest groups at rival companies. The popularity of its leading groups, NCT 127 and aespa, has stayed mostly limited to Asia. Recent ticket sales in North America and other regions also fell short of expectations. That leaves the company far behind the North American ticket power of BTS, BLACKPINK and Stray Kids.

To ease fears that the industry's growth is slowing, the major agencies are turning to new markets. During its earnings call on Nov. 4, HYBE said it plans to build localized groups like KATSEYE in Southeast Asia.

"We have put a lot of effort into hedging our reliance on BTS from a business standpoint," HYBE CEO Lee Jae-sang said on the call. "The growth of local artists in Southeast Asia is a signal that HYBE needs to build local production bases there."

SM Entertainment also said it will push into new markets to build a more balanced lineup of artists.

The strategy across the industry is the same, find the next stars somewhere new. For now, investors seem to want proof before they buy back in.