Shares of Samsung Electronics (OTC:SSNLF) are down roughly 30% this year and more than 40% since the 2021 record peak. Still, they could stage a near-term relief rally if analysts' expectations for Q2 come to fruition.
Robust Demand for Memory Chips
Reuters’ estimates show that the South Korean electronics giant is estimated to report its best Q2 profit since 2018, suggesting a year-over-year (YoY) rise of 15% driven by stronger demand for memory chips.
According to Refinitiv SmartEstimate which surveyed 24 analysts, Samsung (KS:005930) is likely to report a second-quarter operating profit of 14.46 trillion won ($11.2 billion), compared to 12.57 trillion in the year-ago period. Analysts estimate Samsung’s chip earnings, which represent roughly half of the company’s profits, surged 49% to about 10.3 trillion won.
Looking at prospects for the global memory chip demand, CAPE Investment & Securities analyst Park Sung-soon believes that the U.S. tech giants including Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOGL), and Microsoft (NASDAQ:MSFT) are likely to continue buying to take advantage of the rapidly-growing demand for cloud solutions. He added that chip inventories at these companies are lower than 2018 levels.
On the other hand, analysts expect Samsung’s profit from its mobile business to have declined by around 17% to 2.7 trillion won, relative to the same quarter last year. The company’s smartphone shipments are estimated to have fallen to between 61 million and 68 million units in Q2, compared to 74 million in the year-ago quarter.
Foxconn Hiking Guidance is a Positive Read for Samsung
Despite fears, industry trends remain robust despite the ongoing economic slowdown with Apple’s Taiwan-based supplier Foxconn hiking its full-year guidance. The company also shared an optimistic view about the third quarter.
Foxconn’s positive report comes as global chipmakers continue to face demand-related headwinds due to a worldwide chip crunch after two unprecedentedly difficult years due to Covid-19. The chip crunch forced carmakers and other companies to pay more for crucial chip parts, which ultimately resulted in price hikes.
Furthermore, smartphone sales in China have been diminishing sharply as Beijing's zero-COVID policy weighed on consumer demand and worsened the already-high inflation. Fears over a new drawdown in major markets due to inflation and geopolitical tensions are also hurting corporate and consumer spending.
Samsung’s rival memory and data storage manufacturer Micron Technology (NASDAQ:MU) said last week it expects to miss quarterly revenue numbers as the market had declined significantly in a short time period.
However, the Boise, Idaho-based memory chipmaker said it remains optimistic about long-term demand. This was not enough to prevent several Wall Street analysts from cutting their ratings on Micron to reflect the difficult macroeconomic environment.
Mirae Asset Securities, South Korea’s largest investment banking company by market cap, expects Samsung’s compound annual growth rate (CAGR) of capital spending in the period from 2017 to 2023 to be 7.9%.
According to analysts, Samsung has been facing difficulties in the market as profits from older chips came weaker than expected in the past year. However, the company’s business has seen a major improvement recently.
New Products Announced to Reignite Growth
Last week, Samsung announced it has started mass production of chips using the sophisticated 3-nanometre technology, marking the first company in the world to do that as it attempts to lure more clients and close the gap with its contract chipmaker rival, TSMC.
Samsung claims the new 3-nanometre chips are able to slash power consumption by as much as 45%, while boosting the performance and reducing area by 23% and 16%, respectively, compared to the 5-nanometre chips.
Samsung did not refer to any clients for its next-gen chips by name, though analysts believe that the South Korean giant itself and Chinese companies are expected to be the first users.
TSMC, the world’s biggest foundry chipmaker, holds around 54% of the global market for contract manufacturing of chips. The Taiwanese giant counts Apple (NASDAQ:AAPL) and Qualcomm (NASDAQ:QCOM) among its biggest clients.
The second place in that market belongs to Samsung, though the company currently controls just 16.3% of the global market, according to TrendForce. However, the company announced a 171 trillion won ($132 billion) investment plan in 2021, aimed at overtaking TSMC by 2030.
Siyoung Choi, Head of Foundry Business at Samsung, said:
"We will continue active innovation in competitive technology development."
While Samsung is the world’s first company to manufacture a 3-nanometre chip, TSMC announced its plan to begin producing 2-nanometre chips in 2025. Moreover, Samsung currently dominates the memory chip market but TSMC overtook the electronics maker when it comes to spending in the more diverse foundry business.
Daol Investment & Securities analyst, Kim Yang-jae, added:
"Non-memory is different, there's too much variety. There are only two kinds of memory chips - DRAM and NAND Flash. You can concentrate on one thing, raise efficiency and make a lot of it, but you can't do that with a thousand different non-memory chips."
Nikkei’s Report a Reason to be Concerned?
Shares of leading global chipmakers turned lower last month after Nikkei Asia reported that Samsung is reportedly pausing new procurement orders and has asked its suppliers to cut or postpone shipments of some components due to challenges around mounting inventories and record-high inflation.
The request covers parts and components for numerous Samsung product lines such as television sets, smartphones, and home appliances, among others. Moreover, the postponement of orders also applies to a mix of key parts including chips and electronics components.
Samsung’s order to its suppliers indicated that electronics manufacturers are not optimistic about the prospects of the global economy as inflation continues to hover around the highest level in more than 40 years.
The world’s largest maker of TVs and home appliances said to suppliers it must thoroughly examine its inventory levels of both parts and final products. According to Nikkei Asia, the temporary procurement reduction will remain in effect until the end of this month.
In its report for the fiscal first quarter, Samsung said inventory assets hit 47.6 trillion won ($36.9 billion) at the end of the three-month period, compared to 41.4 trillion won in December. The report also showed that the ratio of inventory assets to total assets surged to 10.8%, from 9.7% in December.
Samsung’s request marks a sharp U-turn from last month when the tech behemoth told suppliers it feels confident about the outlook of the year ahead and that it is still expected to ship a minimum of 270 million smartphones in 2022, which is close to what the company has shipped in 2021.
On the other hand, Chinese smartphone makers Vivo, Xiaomi (OTC:XIACF), and Oppo have cut back orders by at least 20% as softening demand and major coronavirus lockdowns in China dented demand.
Summary
Samsung stock price is trading sharply lower this year as chipmakers struggle to cope with extremely challenging macro headwinds. Still, shares could turn north if Samsung can match analysts' expectations and deliver one of the best quarters, profit-wise, in several years.