Samsung Elec Q2 profit likely to drop 39% on weak AI chip sales

Samsung Electronics is forecast to report a 39% plunge in Q2 operating profit to 6.3 trillion won ($4.62 billion), its lowest in six quarters, primarily due to delays in qualifying and supplying advanced HBM chips to AI leader Nvidia. This HBM market underperformance, exacerbated by U.S. restrictions on China sales, has heightened investor concerns regarding Samsung's competitive position against rivals like SK Hynix and Micron, while broader U.S. trade policy uncertainties further cloud its outlook.

Analysis

Samsung Electronics is projected to report a 39% year-over-year plunge in its second-quarter operating profit to 6.3 trillion won, its lowest income in six quarters. This significant downturn is primarily driven by the company's failure to secure timely qualification and begin mass supply of its advanced high-bandwidth memory (HBM) chips to AI industry leader Nvidia. This delay has exacerbated investor concerns about Samsung's ability to compete with rivals SK Hynix and Micron, which are currently capitalizing on robust AI-driven demand. The company's stock performance reflects this struggle, as its 19% year-to-date gain significantly underperforms the KOSPI benchmark's 27.3% rise, making it the worst-performing major memory chipmaker this year. Adding to the pressure are persistent geopolitical headwinds, including U.S. restrictions on chip sales to China and the looming threat of further U.S. trade policy actions, which create uncertainty for both its chip and smartphone businesses. While the company has initiated HBM chip supplies to AMD, analyst commentary suggests that significant revenue from Nvidia is unlikely in 2024, indicating that this operational bottleneck will continue to weigh on performance.

Key Decisions for Investors

• Investors should closely monitor any announcements regarding the qualification status of Samsung's HBM3E chips with Nvidia, as this is the primary catalyst required to reverse negative sentiment and close the competitive gap with peers.
• Given Samsung's documented underperformance relative to SK Hynix and Micron, it is crucial to assess whether the current valuation adequately discounts the execution risk and market share loss in the high-growth AI memory sector.
• It is prudent to factor in the escalating geopolitical risks from U.S. trade policies, as potential tariffs on smartphones and further restrictions on its China operations could introduce additional earnings volatility.