Text: Mao Ting, Finet Club
Nvidia (NVDA.US) demonstrated the superiority of its Blackwell platform at the AI Summit and gave quite optimistic expectations, driving Nvidia and other AI chip stocks to rise sharply, Nvidia rose 4% on October 8, and its market value once again surpassed Microsoft (MSFT.US), and its main wafer supplier TSMC (TSM.US) rose 0.83%.
However, Samsung Electronics, which is supposed to benefit from the opportunities brought by the surge in demand for AI storage, after releasing its Q3 2024 earnings guidance, many investors chose to vote with their feet, causing the stock price to fall by more than 1%.
Samsung's "sadness" for investors is related to its poor performance and expectations in the chip field.
Samsung's chip business did not perform as well as it should
Founded in 1969, Samsung Electronics was listed on the Korea Stock Exchange in 1975.
At present, Samsung mainly operates four business units: DX (Device Experience Division), which is mainly engaged in digital TV, smart phones and communication systems; DS (Device Solutions) segment, which is mainly engaged in large-scale integration (LSI) of memory chips, wafers and systems; SDC is mainly engaged in display panel business; Harman specializes in connected car systems, audiovisual products, enterprise automation solutions, and connected services.
According to unaudited preliminary data, Samsung Electronics' sales in the third quarter were 79 trillion won (about 412.4 billion yuan), a year-on-year increase of 17.2%; Operating profit was 9.1 trillion won (about 47.5 billion yuan), although it increased by 274.5% year-on-year, it decreased by 12.8% month-on-month, and was lower than the market expectation of 10.3 trillion won.
From a business operations perspective, DS, or the Equipment Solutions segment, could be a headwind for earnings expectations.
In the first half of the year ended June 30, 2024, DS (Device Solutions Division) contributed 35.41% of Samsung Electronics' revenue, but accounted for 49.06% of the total operating profit, making it the business unit with the highest operating margin, mainly due to the increased demand for its chips and solutions accelerated by AI investment.
In its results for the first half of 2024, Samsung Electronics mentioned that from the perspective of the market as a whole, the expansion of large-scale customer investment in AI has not only driven strong demand growth for HBM, but also benefited the demand for traditional DRAM and SSD.
Samsung's own revenue in the second quarter increased significantly from the previous quarter, thanks to higher sales of HBM, DDR5 and other high-value-added products for AI, as well as higher overall prices.
Samsung said it has strengthened its leading position in the DDR5 field by selling its first 128GB product based on 1b nanometer 32Gb DDR5 technology, which it pioneered and mass-produced.
For the second half of the year, Samsung is also full of confidence in the development of its DS business, when the company expects that in the second half of 2024, from the perspective of the entire market, due to the continuous investment in AI, it is expected that the demand for server AI will remain strong, and HBM, DDR5 and SSDs should all perform well.
However, the increase in HBM and server DRAM production and sales may further limit the supply of DRAM and HAND legacy products. Samsung will expand its sales of high value-added products for AI in the second half of the year, including sales of AI such as HBM3E and high-density server modules based on its 1b nano 32GB DDR5 technology.
In System-on-Chip (SOC), Image Sensors and DDI, earnings improved due to increased supply, which drove its first-half revenue to a record 50% year-over-year growth.
In the face of market uncertainty and competition, Samsung said that it will focus on the stable supply of Exynos-2500 in the future, expand the application of 200 million pixel image sensors in smartphone cameras from wide angle to telephoto, plan to provide DDI products for new models for United States customers in the second half of the year, and start mass production of new server PMIC products in the fourth quarter.
The ideal is very plump, and the reality is very skinny
On the wafer side, Samsung's wafer product revenue grew quarter-on-quarter due to a rebound in demand for key applications, and the AI and HPC customer base doubled from the previous year, mainly due to higher new orders for sub-5nm technology.
With the development and distribution of the 2nm Gate Around (GAA) Process Development Kit (PDK), Samsung Electronics said it will support customers in advancing product design in the future as part of its preparations for mass production of 2nm technology in 2025.
Samsung highlighted that it expects the overall wafer market to grow, especially advanced processes, which will benefit from a rebound in demand for mobile phones and AI/HPC. With the full volume production of the second-generation 3nm GAA technology for the sub-5nm advanced process, Samsung expects its revenue growth to outpace the market in 2024. At the same time, the company said it will expand its order book for artificial intelligence and high-performance computing applications, aiming to increase its customer base by 4 times by 2028 and increase sales by 9 times compared to 2023.
However, the reality does not seem to be as good as it could be.
In September, Korean media reported that Samsung Electronics may cut its overseas employees by 30%, and due to ongoing problems with the 2nm process, Samsung may decide to withdraw personnel from the Taylor factory in Texas, which may mean that its advanced wafer foundry business has suffered another setback.
Located next to the Taylor plant of major technology companies, the strategic goal is to attract customers in the United States and serve as a mass production center for advanced processes below 4nm. But despite its rapid growth, Samsung continues to face 2nm yield issues, with lower performance and capacity than its main competitor, TSMC.
According to reports, Samsung's foundry yield is below 50%, especially for advanced processes below 3nm, while TSMC's advanced process yield is about 60%-70%, which further widens the market share gap between Samsung and TSMC. Samsung's total gate of wrap-around (GAA) yield of about 10%-20% is not enough to handle orders and mass production, which may force Samsung to rethink its business strategy and withdraw employees from the Taylor plant.
Samsung Electronics is said to have signed a preliminary agreement to receive 9 trillion won in subsidies from the United States' chip bill, but the key condition is that the factory must operate smoothly, and Samsung's current problems may put the agreement at risk.
The apology letter exposes the death of Samsung Electronics' AI?
Due to the performance forecast falling short of expectations, the head of Samsung Electronics' chip business rarely apologized for this. Samsung said that the company's memory chip business saw a decline in profitability as chip competitors increased their offerings for "traditional" products and some mobile phone customers adjusted their inventories, offsetting strong demand for high-bandwidth memory (HBM) and other server chips.
In fact, Samsung Electronics' apology letter is apologetic, but not sincere, there is no detailed improvement method, and there is no specific direction and goal, the apology is in place, or it is not enough to impress investors and customers. Technological innovation and product quality are the most convincing proof.
SK hynix, which supplies HBM chips to NVIDIA, has begun to take the lead in mass production of 12-layer HBM3E chips last month, while there is no news on whether Samsung Electronics' 12-layer HBM3E has passed NVIDIA's qualification test, which has further widened the gap between Samsung and SK hynix's supply progress.
Samsung Electronics' strongest mobile phone business may also face competition from Huawei's triple-screen phones, while Apple (AAPL.US) has also launched a new iPhone 16 with new generative AI features.
How will the embattled Samsung face the many challenges under the AI wave in the future?