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The enthusiasm surrounding artificial intelligence has sparked a frenzy in the market. Investors have placed substantial bets on the shares of Samsung, the world’s leading memory chip manufacturer. However, a significant drop in Samsung’s second-quarter earnings guidance suggests that AI-driven growth will take longer than expected to translate into profits.
The estimated operating profit has plummeted by 96%, reaching its lowest point in 14 years. Additionally, sales have fallen by a larger-than-expected 22%, amounting to Won60tn ($46bn).
Analysts predict that the chips business will incur an operating loss of at least Won3.3tn and may become the only loss-making division within the group. This comes as a surprise to investors who have driven up Samsung’s shares by 25% this year, anticipating a surge in chip demand from AI-related industries. Samsung’s shares currently trade at a 40% premium compared to regional peers, with a forward earnings multiple of 24.
While it’s true that Samsung produces chips crucial for generative AI servers, the demand for these chips will not materialize in the near future. The more pressing concern is the surplus of chips caused by frantic stockpiling during the global shortage of 2021. Customers now hold significant chip inventories, leading to lower sales forecasts and contract volumes. Furthermore, the decline in demand for smartphones and computers, as remote working declines, has resulted in declining chip prices, with certain types experiencing a drop of up to 20% in the second quarter.
However, the long-term investment outlook for Samsung remains positive. Chip demand is expected to rise from AI-related companies, and Samsung’s position as the world’s largest manufacturer of smartphones and TVs provides a hedge that other chipmakers lack. Additionally, there is potential to reduce high marketing costs.
The inflated valuation of Samsung reflects the hype around AI. It is advisable to wait for chip prices to recover, which may not occur until next year, before considering new investments.
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