Terminal demand is weak, Samsung Electronics' chip business Q4 net profit plummeted by 74%, but future chip demand looks promising.

On Wednesday, January 31st, Samsung Electronics released its fourth-quarter earnings report, which showed a decline in both revenue and operating profit, but an improvement compared to the previous quarter, meeting expectations.

In the fourth quarter, Samsung Electronics' revenue decreased by 3.8% YoY to KRW 67.8 trillion, and operating profit decreased by 34% YoY to KRW 2.8 trillion. For the full year of 2023, Samsung Electronics' operating profit is expected to decline significantly by 85% YoY to KRW 6.5 trillion, the lowest since 2008.

After the financial report was released, Samsung Electronics' stock price fell by 1.4%, lagging behind the Kospi index and the MSCI Asia-Pacific index.

Samsung Electronics attributed the decline in operating profit to the sluggish demand for televisions and other consumer electronics products, offsetting the gains from the recovery in the chip industry.

Samsung Electronics stated that it expects its business to improve throughout the full year of 2024, with stronger market demand for semiconductors driven by the development of artificial intelligence.

Due to the continued headwinds in the macroeconomic environment, Samsung Electronics expects "moderate improvement" in profitability in the first half of 2024, followed by "more significant improvement" in the second half.

During the conference call, Samsung Electronics stated:

"We will focus on increasing sales of high-value-added products to improve profitability."

Transition to the high-end market, weakness in the smartphone business

The financial report showed that Samsung Electronics' smartphone sales and profits both declined MoM in the fourth quarter, partly due to the launch of the new model, Galaxy Z Flip5, in the third quarter.

Bryan Ma, Vice President of IDC Devices Research, commented to the media:

"To be frank, part of the reason is that the smartphone market is shifting towards the high-end market. This is why Apple is performing well because they are more focused on high-end products, while Samsung Electronics has a broader business scope."

Ma stated that although Samsung Electronics' global market share in smartphones has dropped to second place after Apple, its average selling price has increased by about $100 from 2020 to 2023.

"This indicates that the market for Samsung Electronics is shifting towards the high-end. I believe that as the transition continues, this will be one of the factors driving profit margins."

Memory Business Continues to Recover This Year, Expected to Return to Profit in the First Quarter

According to the earnings report, Samsung Electronics' main business, the chip division, recorded a full-year loss of KRW 14.9 trillion (approximately USD 11 billion) in 2023. The chip division's loss in the fourth quarter narrowed MoM to KRW 2.18 trillion, exceeding analysts' expectations. The net profit dropped by 74% to KRW 6.02 trillion, but the DRAM business turned losses into profits.

Last year, in the context of high inflation and subdued consumer demand, coupled with excess inventory during the pandemic, the chip industry as a whole experienced a downturn, with both TSMC and SK Hynix's chip businesses seeing quarterly declines.

However, this situation is expected to improve this year.

Data from global technology market analysis firm Canalys shows that the global PC market saw a recovery in the fourth quarter, with a slight YoY growth of 3%. Samsung Electronics' competitor, SK Hynix, also stated last week that chip prices will improve this year as customers need to replenish inventory, while manufacturers will continue to reduce traditional chip production.

Analysts also told the media that the weak demand in the memory industry has bottomed out, and chip manufacturers' production cuts have consumed a significant portion of the excess inventory.

Samsung Electronics also expressed optimism about the prospects of its chip business:

"Despite various potential obstacles, including interest rate policies and geopolitical issues, the memory business and IT demand are expected to continue to recover in 2024."

"This capital expenditure will take effect this year, and the chip business is expected to return to profitability in the first quarter of this year."

In addition, the sales of High-Bandwidth Memory (HBM) in the fourth quarter increased by more than 40% MoM, indicating signs of a recovery in memory demand, and smartphone shipments are expected to grow.

Poor Performance of HBM and Foundry Business Weighs Down Stock Price

Despite the overall performance of the earnings report meeting expectations and the chip business showing signs of improvement, the stock price of Samsung Electronics has not been boosted.

Professionals believe that the overall underperformance of the HBM and foundry businesses is the reason for the weak stock price performance.

Lee Seung-Woo, an analyst at Eugene Investment & Securities, said:

"The weak stock price of Samsung Electronics is due to its lag behind SK Hynix in HBM and a significant lag behind TSMC in the foundry business."

"If Samsung Electronics improves in these two areas, there may be better expectations for stock price performance. However, at the moment, these expectations are not strong."

As the "darling" of the AI era, HBM products, with their advantages of higher bandwidth, lower power consumption, and smaller size, have become the "weapons" of computing power that major technology giants are eager to acquire. Therefore, they have also become the focus of top chip manufacturers such as Samsung Electronics, TSMC, and SK Hynix in the AI arms race. Compared to the previous quarter, the SK Hynix quarterly report shows that DDR5 sales have increased by more than four times, and HBM3 sales have increased by more than five times.

Kim Jaejune, the Executive Vice President of Samsung Electronics' memory business, stated that they will "actively consolidate their competitiveness as a leading HBM supplier" and mentioned that "Samsung Electronics' scale can help drive the upgrade of HBM products."

On the other hand, Samsung Electronics appears to be more pessimistic about its foundry business. Jeong Gibong, the Executive Vice President of Samsung Electronics, stated that although orders have increased, Samsung Electronics' foundry business may not recover in this quarter as customers continue to destock to avoid oversupply.