Track Hyper | What's going on with Samsung Electronics?

Author: Zhou Yuan / Wall Street News

The semiconductor industry leader, South Korea's Samsung Electronics, has recently been facing a tough year.

Samsung Electronics just released its third-quarter earnings forecast on October 8th, showing that both profit and revenue for the third quarter are expected to be below market expectations.

It is estimated that the operating profit for the third quarter will be approximately 91 trillion Korean won (about 6.79 billion U.S. dollars), a year-on-year increase of 274.5%, but a decrease of 12.8% compared to the previous quarter. This is 1.744 billion U.S. dollars lower than the expected 115 trillion Korean won (about 8.534 billion U.S. dollars); achieving revenue of 790 trillion Korean won (about 58.534 billion U.S. dollars), setting a new record for a single quarter since the first quarter of 2022, with a year-on-year growth of 17.2%, but still 1.904 billion U.S. dollars lower than the expected 81.57 trillion Korean won (about 60.438 billion U.S. dollars).

This situation is somewhat similar to NVIDIA, where the performance is actually not bad, but unfortunately the market expectations are higher.

Samsung Electronics explained that the decline in profitability of its memory chip business was due to increased competition from chip competitors in traditional products and adjustments in inventory by some mobile phone customers, offsetting the strong demand for high-bandwidth memory (HBM) and other server chips.

However, in terms of market performance, Samsung Electronics' market share and supply relationship with NVIDIA in HBM are not as strong as its long-term competitor SK Hynix; additionally, in the foundry field, Samsung lags behind Taiwan's TSMC. All of these have raised concerns in the market about the uncertainty of Samsung Electronics' key chip business market prospects.

Due to these concerns, Samsung Electronics' stock performance this year can be described as poor: from the beginning of the year to date, Samsung Electronics' stock price has fallen by over 22% (Wind data).

Analytical institutions have taken the opportunity to lower Samsung Electronics' target price. In a report on September 25th, Macquarie downgraded Samsung Electronics from "outperform the market" to "neutral" and lowered its target price from 125,000 Korean won (about 92.79 U.S. dollars) to 64,000 Korean won (about 47.45 U.S. dollars), a decrease of up to 48.8%.

Despite Samsung Electronics making four consecutive adjustments to the technology and organizational structure of HBM in the first half of this year, progress in supplying NVIDIA's latest HBM memory products remains very slow.

As a result, Jun Young-hyun, the newly appointed head of Samsung Electronics' chip business (Vice Chairman of the Device Solutions (DS) Division), issued a warning that Samsung Electronics must change its workplace culture, otherwise it will fall into a "vicious cycle." At the same time, after Samsung Electronics released its third-quarter earnings forecast, Jun Young-hyun sent messages to company clients, investors, and senior employees apologizing for the performance falling below market expectations.

In Samsung Electronics' history, it is extremely rare for leaders of core business departments to publicly issue apology statements for underperforming.

Samsung Electronics is also globally cutting staff in sync (Australia, New Zealand, Southeast Asia, etc.) to reduce costs.

Market reports indicate that in 2023, Samsung's foundry business orders are insufficient, leading to a deficit of over 2 trillion Korean won (about 14.837 billion U.S. dollars), and it is expected that there will also be a loss of tens of trillions of Korean won this year. Therefore, Samsung Electronics has been optimizing and adjusting its operating rates by halting some foundry facilities According to the market research company TrendForce in Taiwan, TSMC's market share in the second quarter of this year was 62.3%, which is 50.8 percentage points higher than Samsung Electronics' 11.5% market share.

It seems that Samsung Electronics not only needs to narrow the gap with TSMC, but also faces the challenge of catching up with SK Hynix.

Of course, before catching up with these two strong competitors, Samsung Electronics can still rely on the demand for smartphones and PCs to drive the demand for storage chips. In addition, despite lagging behind SK Hynix, Samsung still leads in HBM business compared to Micron Technology, which further contributes to Samsung's performance.

Market forecasts indicate that in the third quarter, Samsung Electronics' semiconductor division is expected to achieve an operating profit of 5.3 trillion Korean won (approximately $39.292 billion).

On July 31st, Samsung Electronics announced its financial report for the second quarter, showing that in the second quarter of this year, Samsung Electronics achieved an operating profit of 10.44 trillion Korean won (approximately $77.33 billion), a year-on-year increase of 1462.29%. The sales revenue was 74.07 trillion Korean won (approximately $549.25 billion), a year-on-year increase of 23.44%.

Samsung Electronics will release its official financial report for the third quarter on October 31st