Chip giants, profits soared 1458%

Latest update time：2024-07-31

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Samsung Electronics posted its fastest net income growth since 2010 after a boom in artificial intelligence boosted earnings at its semiconductor unit.

The world's largest memory and smartphone maker reported a six-fold increase in June quarter net income to 9.64 trillion won ($6.96 billion), compared with an average analyst forecast of 7.97 trillion won. Samsung earlier this month reported a 15-fold increase in preliminary operating profit on a 23% revenue increase, the biggest sales increase since 2021.

The better-than-expected results suggest the global computing market is emerging from a long post-pandemic slump, thanks in part to a wave of spending on artificial intelligence development from the United States to China. Samsung, like SK Hynix, supplies semiconductors used in servers and mobile device storage, and also sells a slew of consumer electronics.

Samsung’s key semiconductor unit reported better-than-expected operating profit of 6.45 trillion won, its second straight quarterly profit after four straight quarters of losses. Samsung’s shares were boosted by rising memory prices and strong demand for high-bandwidth memory chips (HBM), which help save power while supporting faster processing speeds needed for AI.

Investors have been concerned about Samsung’s position in the fast-growing HBM market. Shares of South Korea’s largest company have underperformed those of smaller rival SK Hynix, now a major supplier of HBM. The company’s latest chips have struggled to get certified by Nvidia Corp., which has become the world’s most valuable chipmaker due to booming demand for AI accelerators.

But Samsung is finally starting to make progress in closing the gap with SK Hynix. Samsung has reportedly received the long-awaited approval from Nvidia for its HBM3 version of its HBM chip, and expects the next-generation HBM3E to be approved within two to four months.

SK Hynix is one of the main beneficiaries of the race to supply the components necessary to create generative AI services like ChatGPT. Revenue from its HBM chips (paired with Nvidia’s accelerators) surged more than 250% in the June quarter. That has driven SK Hynix shares up more than 150% since the start of 2023, more than three times Samsung’s performance.

Early trade data from the customs office showed South Korea’s semiconductor exports rose 57.5% in the first 20 days of July. Asia’s fourth-largest economy is one of the world’s top exporters of computer chips, making it a useful indicator of global technology demand. Chip shipments have picked up in recent months.

Samsung's strong rebound in second-quarter profits, announced on July 5, could extend into the third quarter, driven by memory chips, analysts said. Samsung's second-quarter operating profit was 25% higher than consensus estimates, meaning average selling prices for DRAM and NAND may have risen, in line with peer Micron. Samsung's profits could rise further as demand for memory chips is likely to see a seasonal increase in the second half of the year.

“With the average selling price of memory expected to continue its upward trend in the coming quarters, we expect Samsung Electronics’ quarterly profit to continue to rise until 2025,” CLSA said in its second-quarter forecast for Samsung released earlier this month.

"We expect memory prices to continue to rise until the first half of 2025 following recent AI semiconductor roadmap announcements by Nvidia and global chipmakers," Daiwa Capital Markets analyst SK Kim said in a report last month. "We believe this is due to heightened concerns over memory supply due to strong demand for HBM and high-density enterprise SSDs, which use more wafers and have longer production lead times."

“SK Hynix and Micron will continue to challenge Samsung in the memory space, both in AI and in the AI smartphone and PC markets, as well as through close collaboration and optimization with major computing players such as Qualcomm, Intel and Nvidia,” Neil Shah, vice president of research at Counterpoint Research, said in emailed comments to CNBC.

Samsung Semiconductor, better-than-expected recovery

Samsung Electronics today announced its financial results for the second quarter ending June 30, 2024.

The company posted consolidated revenue of 74.07 trillion won and operating profit of 10.44 trillion won as favorable memory market conditions drove up average selling prices (ASPs), while strong sales of OLED panels also contributed to the performance.

Samsung said its DS division posted consolidated revenue of 28.56 trillion won and operating profit of 6.45 trillion won in the second quarter.

The overall memory market continued to recover, driven by strong demand for HBM as well as traditional DRAM and server SSDs. The demand growth is the result of continued investment in AI by cloud service providers and growing demand for AI from enterprises on their local servers.

PC demand was relatively weak, while mobile product demand remained strong due to increased orders from Chinese OEM customers. Server application demand continued to be strong, with second-quarter results improving significantly from the previous quarter as the company responded to demand for high-value-added products for generative AI applications.

The company was the first in the industry to mass-produce 128GB products based on 1b nanometer (nm) 132Gb DDR5, consolidating its leadership in the DDR5 market.

AI servers are expected to take a larger market share as major cloud service providers and enterprises expand their AI investments in the second half of 2024. Since AI servers equipped with HBM also have a higher single-box content capacity relative to traditional DRAM and SSDs, demand is expected to remain strong across the board, from HBM and DDR5 to server SSDs.

As production capacity is concentrated on HBM, server DRAM, and server SSD for AI applications, the supply of traditional bits for leading-edge products in PCs and mobile devices is expected to be limited.

The company plans to actively respond to the demand for high value-added products in artificial intelligence and will expand production capacity to increase the sales share of HBM3E. The company will also focus on high-density products such as server modules based on 1b-nm 32Gb DDR5 in server DRAM.

For NAND, the company plans to increase sales by strengthening the supply of triple-level cell (TLC) SSDs, which still account for the majority of AI demand, and will meet customer demand for quad-level cell (QLC) products, which are optimized for all applications including server PCs and mobile devices.

The System LSI Business Unit posted record sales in the first half of the year, and earnings improved in the second quarter due to increased supply of key components such as system-on-chip (SoC), image sensors and display driver ICs (DDI) for major flagship products.

Initial response to the new SoC for wearable devices using the industry's first 3nm technology has been positive, and major customers are expected to expand adoption of SoCs using this technology in the second half of this year. The company also plans to ensure a stable supply of the Exynos 2500 for flagship models.

The System LSI Business will focus on expanding the application of 200-megapixel sensors from main wide-angle cameras to telephoto cameras, and plans to expand sales of DDI products by starting mass production of new models for U.S. customers.

The foundry business' earnings improved due to increased demand in various application areas. The number of AI and high-performance computing (HPC) customers increased by two times compared with the previous year due to increased orders for sub-5nm technology. The foundry business also distributed the process development kit (PDK) for 2nm all-around gate (GAA) technology to customers in advance to achieve mass production in 2025.

In the second half of the year, the foundry business expects mobile demand to rebound and AI/HPC application demand to continue to maintain high growth. Therefore, the foundry market is expected to grow overall, especially in advanced nodes. In 2024, driven by the full mass production of the second-generation 3nm GAA technology, the company expects growth to exceed the market.

The foundry business plans to continue expanding orders for AI/HPC applications, with the goal of increasing the number of customers fourfold and sales tenfold by 2028 compared to 2023.

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