AI chip boom is a bust for Samsung’s earnings

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A global boom in AI chip demand last year fuelled investor hopes that chipmaker profits would match that surge. Yet one of the sector’s largest, Samsung, is set to report its smallest earnings haul in 15 years. 

The South Korean chipmaker expects a 35 per cent drop in operating profit in the fourth quarter, according to guidance provided on Tuesday. That miss on market expectations marks the sixth straight quarter that operating profit has declined. Operating profit of Won2.8tn ($2.1bn) in the December quarter means its annual figure fell below Won10tn for the first time since 2008.

Part of the weakness is down to global trends. Consumers are buying fewer electronic devices, including smartphones, PC and TVs as economic growth slows and high inflation bites. The lingering effects of a semiconductor sector downturn that worsened early last year continues to weigh on overall demand for chips.

But much of the problem is company specific. Samsung has lagged peers in two of the hottest areas in the industry: chip contract manufacturing and AI chip-related technology. In the foundry business, in which chips are manufactured on behalf of other companies, TSMC has extended its lead in recent years. It accounts for 59 per cent of global market share, while Samsung’s share has declined to just 13 per cent, according to data from Counterpoint research. 

A surge in demand for high bandwidth memory, or HBM, a critical component in all AI chips, has meant new growth for memory-chip makers. For most of last year, rival SK Hynix was the only company able to mass-produce the latest generation of HBM3 products, the ones that are used in Nvidia’s latest accelerators. That head start positioned SK well for last year’s AI chip boom and left Samsung scrambling to catch up.

The concern is that the weak earnings come despite rising average prices of memory chips. In the last quarter, those rose by about a tenth.

Samsung shares are up a quarter in the past year, and trade at 24 times forward earnings, a near 50 per cent premium to TSMC. Foreign investors had been a big factor in last year’s chip stock frenzy. This now looks overdone. Justifying that premium for Samsung will prove increasingly difficult.

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