Samsung: small AI market cannot lead chip cycle revival

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Sometimes, a near 80 per cent drop in earnings is reason to celebrate. Samsung Electronics shares rose following the release of third-quarter preliminary results that showed a 78 per cent decline in operating income. The price increase reflects rock bottom expectations for the South Korean chipmaker. But it is still too early to declare a comeback. 

Operating income fell to about Won2.4tn ($1.8bn) as sales dropped 13 per cent in the September quarter. But that compared with a record 95 per cent operating income decline in the previous quarter. Optimists took this as a sign that the chip market cycle has already bottomed. 

Chipmakers have been cutting memory chip output this year in order to shore up profitability.

This does not, however, justify Samsung shares rising by more than a fifth this year. They trade at 21 times forward earnings — a premium to chipmaker rivals including TSMC of Taiwan.

Blame for this pricey valuation falls partly on hopes that Samsung can benefit from artificial intelligence hype. The company produces so-called “high bandwidth memory solutions”. These stacks of chips process data faster than alternative technologies. They are used in the graphics processing units needed for AI development. Samsung is expected to double its existing production capacity for these chips.

The problem, however, is that Samsung has already lost the lead in this market to local peer SK Hynix. Moreover, the product accounts for just about 1 per cent of the global DRam chip market. Market demand for AI-related solutions will take years to outpace demand for chips from traditional clients such as smartphone and carmakers.

Production cuts will take time to affect chip supply. Even when the effects do kick in, suppressed demand means there is a limit to how much of a boost it will generate for chip prices. The worst may be over for the chip cycle. But that does not mean a dramatic near-term rebound for Samsung earnings.