Through long-term contracts, AI suppliers can now predict their revenue for the coming years, and based on this, they are presenting high growth and profitability to investors.
An analysis has emerged that contract-based stable revenue structures are being utilized as the core logic for corporate value appreciation, the Wall Street Journal (WSJ) reported on the 20th (local time).
▲ Memory Semiconductor Market, AI Changed the 'Rules of the Game'
The expansion of long-term contracts is most evident in the memory semiconductor industry.
Recently, memory manufacturers and their customers are signing supply contracts for much longer periods than in the past. This is because the rapid spread of autonomous AI agents is causing an explosive increase in large-capacity memory demand.
In the past, the memory industry was evaluated as a representative cyclical industry with high earnings volatility due to fierce price competition and economic cycles, but analysis has suggested that increasing AI demand is transforming the industry structure itself into a more stable form.
▲ Samsung, SK Hynix, and Micron Recording Record Highs
Samsung Electronics, SK Hynix, and U.S.-based Micron are recording historically high earnings boosted by increased AI memory demand.
These companies are forecasting that the current supply shortage will continue until 2028.
An SK Hynix official listed on the New York Stock Exchange recently explained at the April earnings announcement that the expansion of long-term contracts could serve as an opportunity to improve market evaluation of the entire memory industry.
▲ Micron Expands 5-Year Long-Term Contracts…Secures Over Half of Revenue
According to the WSJ, Micron is evaluated as one of the most actively expanding companies in long-term supply contracts.
The company's 'Strategic Customer Agreements' are mostly executed as 5-year contracts with a 'Take-or-Pay' arrangement applied.
This is a structure where customers must make payment for the contracted amount even if they do not actually receive the product supply.
Sanjay Mehrotra, Micron's Chief Executive Officer (CEO), stated at the earnings announcement last month that over half of the company's future revenue will come from such long-term contracts.
▲ Investors Cheering…But It Could Be Different During Downturns
Such long-term contracts are being accepted by investors as a factor guaranteeing stable future earnings.
In fact, Micron's stock price has risen approximately three times this year, while SK Hynix has also recorded similar levels of increase. Samsung Electronics' stock price has also nearly doubled.
However, there are observations in the market that long-term contracts may be effective during economic booms but it is uncertain whether they will maintain the same effect during downturns.
▲ If Demand Decreases, Contracts May Eventually Face Renegotiation
If memory demand decreases before the contract period ends, there is a high likelihood that the supply contract will be renegotiated or the contract period will be extended, according to analysis.
From the semiconductor manufacturer's perspective, it is not practical to continue supplying products that customers are not using.
Unsold semiconductors eventually accumulate as inventory, and even when demand recovers, customers consume existing inventory first, so new orders may be delayed, which could also delay revenue recovery for semiconductor manufacturers.
▲ Maintaining Customer Relationships More Important…Forced Supply is a Burden
Suppliers prefer not to adopt a strategy of forcibly selling unwanted products to customers when competitors present more flexible terms.
Forced supply carries the risk of damaging long-term customer relationships, which could ultimately negatively impact market share.
▲ Even During the COVID Semiconductor Boom, Contracts Were Eventually Relaxed
In the history of the technology industry, examples of long-term contracts being relaxed during economic downturns are easy to find.
Even during the period of severe semiconductor supply shortages caused by COVID-19, long-term contracts were utilized as a means to secure funds for facility expansion and determine customer priorities.
U.S. microcontroller manufacturer Microchip Technology, which produces automotive microcontrollers, introduced a 'priority supply program' in 2021, but when the supply shortage turned into supply surplus, the company abolished the program and granted contract exceptions to customers.
CEO Steve Sanghi emphasized contract flexibility in November last year, stating, "We will not force customers to purchase products they do not need."
▲ Entire AI Supply Chain Dependent on Long-Term Contracts
This structure is not limited to the memory industry alone.
Cloud companies like Oracle and CoreWeave are signing long-term contracts with AI developers such as OpenAI, and they in turn are entering into contracts to purchase large quantities of AI servers and semiconductor equipment.
AI semiconductor companies are again outsourcing chip production to TSMC, and TSMC maintains long-term supply contracts with semiconductor equipment companies such as Netherlands-based ASML.
As the entire AI industry is connected through a massive contract structure, the entire supply chain is being reorganized in a form dependent on long-term contracts, according to analysis.
Artificial intelligence [Reuters/Yonhapnews provided]
▲ Oracle Contract Backlog of 638 Billion Dollars…Expanding Future Revenue Base
Oracle signed a major cloud service contract with OpenAI last year.
Based on the last quarter, the company announced it holds remaining performance obligations of 638 billion dollars (approximately 943.219 trillion won).
This refers to the scale of contracts that must be fulfilled in the future.
Hillary Macson, Chief Financial Officer (CFO), explained that such long-term contracts provide very high visibility into future revenue growth.
▲ Big Tech Contract Backlog Increased by Over 1 Trillion Dollars
Since the mid-2025, the AI investment competition has become more intense.
The contract backlogs of the top four AI-investing companies—Google, Microsoft, Amazon, and Oracle—have more than doubled, increasing by over 1 trillion dollars in just over a year.
Companies are pursuing aggressive investment and long-term contracts to secure dominance in the AI market.
▲ If AI Investment Momentum Slows, Contracts May Also Become Risk Assets
The problem is if the AI market's growth rate slows faster than expected.
Concerns are being raised that long-term contracts currently trusted by investors could instead become a factor expanding the adjustment range in the AI industry.
The Bank for International Settlements (BIS) warned in its annual economic report released this month that supply shortages across the AI supply chain are encouraging companies' overinvestment, and expansion of long-term contracts could amplify the shock when demand weakens in the future.
▲ Long-Term Contracts Are Not a Panacea
Market experts evaluated that while long-term contracts do increase predictability regarding future revenue, the contracts themselves do not eliminate market risk.
While AI investment momentum continues, long-term contracts can serve as key evidence for corporate value appreciation, but there is possibility that contract terms can change if demand slows.
In the end, analysis is gaining strength that the substantial long-term contracts supporting the current AI supply chain can serve as a strong safety net during growth phases, but could become the first risk factors facing investors and financial institutions during economic downturns.
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