Samsung's operating profit in the fourth quarter was less than expected but hit a four-year high, boosting hopes of price increases for memory chips this year

Samsung Electronics, the world's largest manufacturer of memory chips and smartphones, disclosed its fourth quarter 2021 earnings guidance before the weekend, and the full financial report, including net profit, will be released on January 27.

Samsung expects operating profit to rise 52.5 percent year-on-year to 13.8 trillion won ($11.5 billion), the highest operating profit in the fourth quarter of the four years since the fourth quarter of 2017.

This, the company said, was largely driven by strong demand for server memory chips and smartphones, as well as higher profit margins for chip foundry manufacturing. Revenue in the fourth quarter of last year is expected to increase by 23.5% year-on-year to 76 trillion won, higher than expected, and the highest quarterly revenue in history.

However, operating profit in the quarter was weaker than the 15.2 trillion won widely expected by factors such as one-time bonuses for employees, marketing costs for mobile businesses, and rising costs for new display panels. At the same time, due to the decline in the price of memory chips in the fourth quarter of last year, the operating profit of the quarter fell by 12.8% month-on-month, and the revenue may increase by 2.7% month-on-month.

The industry also expects Samsung's chip foundry business, which is directly competitive with TSMC, to benefit from increased deliveries and rising prices, with operating profit rising above the 1 trillion won mark in the fourth quarter of last year. Smartphone shipments in the mobile business were around 67 million units, up about 7 percent year-over-year and close to 69.3 million units in the previous quarter, and the headwinds of parts shortages eased despite being weighed down by marketing costs.

Overall, Samsung's operating profit for the full year of 2021 may be 51.6 trillion won, an increase of 43.3% over 2020, and revenue will increase by 17.8% year-on-year to 279 trillion won.

Many analysts said that due to the expectation of the price increase of memory chips this year and the strong business in the field of chip foundry manufacturing, Samsung's financial report this year may be better. Hanwha Securities expects the giant to achieve revenue of KRW 330 trillion and operating profit of KRW 68 trillion in 2022.

But Samsung's earnings report in the first quarter of this year may bottom out first, and then rebound from the second quarter with the price of memory chips. CW Chung, head of Research for Korea & Pan Asia Technology/Semiconductor at Nomura Securities, said server demand was stable and PC demand was better than market concerns.

Bloomberg economist Masahiro Wakasugi also said that weaker memory chip prices could affect Samsung's profit in the first quarter of 2022. But double-digit revenue growth in the fourth quarter of last year, and the upcoming launch of a new Galaxy smartphone, may indicate that revenue continued to grow in the first quarter of this year.

It is also said that despite the decline in memory chips in the fourth quarter of last year, the increase in demand from server customers has also driven quarterly shipments of DRAM memory chips widely used in data centers and NAND flash memory chips for technology equipment data storage.

The Wall Street Journal noted that Samsung is seen as a bellwether for the tech world because it is both a major electronics manufacturer and a parts supplier to giants like Apple and Sony. Therefore, Samsung's revenue growth reflects the dividends enjoyed by the chip production industry due to high demand in the long-term supply tightening environment, and also confirms the market's hope that memory chip prices will rebound. Memory chips such as DRAM and NAND fell in price late last year because global chip shortages hampered the production of a variety of technology products that require memory chips.

At the smartphone level, Samsung shipped 70.4 million units in the fourth quarter of 2019 before the epidemic, and the performance in the fourth quarter of last year was relatively stable, thanks in part to the strong promotion of the high-end folding screen mobile phone series Galaxy Z Fold 3 and Galaxy Z Flip 3.

Samsung had expected that in 2022, the sales of folding screen smartphones would double from last year or triple the number of last year, reaching 15 million to 20 million units, and the overall smartphone shipments would exceed 300 million units, an increase of about 10% over last year. Analysts said that as the sales of folding screen smartphones are on track, Samsung's smartphone business is also expected to improve, but rising marketing costs will hurt profit margins.

Samsung replaced its co-CEO a month ago and launched its largest architecture overhaul since 2017, hoping to strengthen its leadership in the chip space and reinvigorate its smartphone business. The company said last year that it hopes to invest more than $205 billion in chip manufacturing in the next three years and expand semiconductor capabilities beyond memory chips.

Samsung also intends to expand its business by accelerating mergers and acquisitions. Jong-Hee Han, the new co-CEO, revealed at this week's Consumer Electronics Show in Las Vegas that Samsung is negotiating a number of mergers and acquisitions, opening the door to a variety of possibilities:

"[In terms of multiple major businesses such as smartphones, home appliances and semiconductors),I don't know which area of M&A agreements will be implemented and announced first, but we are running faster than the media thinks."

Samsung rose 2 percent at one point in early trading in South Korea on Friday, closing up 1.8 percent and up about 11 percent since early November 2021.