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

Samsung Electronics is projected to report a 39% decline in Q2 operating profit to 6.3 trillion won, marking its fourth consecutive quarterly drop and lowest income in six quarters. This significant underperformance is primarily attributed to persistent delays in qualifying and supplying advanced high-bandwidth memory (HBM) chips for AI leader Nvidia. The situation deepens investor concerns over Samsung's competitive standing in the crucial AI memory market against rivals like SK Hynix and Micron, compounded by ongoing U.S. restrictions on advanced chip sales to China.

Analysis

Samsung Electronics is poised for a significant 39% year-over-year decline in its second-quarter operating profit, which is estimated to be 6.3 trillion won, marking its lowest earnings in six quarters and the fourth consecutive quarterly drop. This pronounced underperformance is primarily driven by the company's inability to capitalize on the booming artificial intelligence sector, specifically due to delays in getting its advanced high-bandwidth memory (HBM) chips certified and supplied to market leader Nvidia. This execution gap places Samsung at a competitive disadvantage to rivals SK Hynix and Micron, who are successfully meeting AI-driven demand. The company's stock reflects this lag, having climbed only 19% this year, underperforming the benchmark KOSPI's 27.3% rise and making it the worst performer among major memory chipmakers. Compounding these internal challenges are external geopolitical pressures, including U.S. restrictions on advanced chip sales to China and the looming threat of further U.S. trade policies, such as proposed tariffs and the potential revocation of technology authorizations for its China-based facilities. While smartphone sales remain solid and a new supply relationship with AMD has begun, these factors are insufficient to offset the weakness in its core HBM chip business.

Key Decisions for Investors

• Investors should closely monitor any official announcements regarding the qualification status of Samsung's HBM3E chips with Nvidia, as this is the primary catalyst needed to address competitive concerns and potentially reverse stock underperformance.
• Given the clear performance divergence, a relative value assessment against peers like SK Hynix and Micron is critical; a potential strategy could involve being underweight Samsung until a clear turnaround in its HBM execution is confirmed.
• It is crucial to price in the escalating geopolitical risks, particularly potential U.S. tariffs and technology restrictions related to China, which pose a tangible threat to future earnings and supply chain stability.
• The new HBM supply agreement with AMD should be tracked as an emerging data point, though its scale is unlikely to compensate for the Nvidia shortfall in the near term.