Samsung’s second-quarter earnings ‘better than expected’ and boost chip stock rally

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Shares of Samsung rose on Thursday, dragging Asian chipmakers higher after the South Korean tech giant released a “better than expected” second-quarter profit forecast.

The figures eased investor concerns about rising inflation, deteriorating consumer demand and rising material costs for semiconductor companies, although analysts warned that weak demand perhaps had not yet fully run its course.

Chip stocks have been hammered this year amid a whirlwind of worries including supply chain disruptions, the Russian-Ukrainian war, rising material costs and runaway inflation threatening demand consumers for products like smartphones. A few days before Samsung’s earnings forecast, US chipmaker Micron warned of a slowdown in demand for consumer products.

This served as the backdrop for Samsung’s results.

But Samsung rose more than 3% on Thursday after saying it expects second-quarter revenue to rise 22% year-on-year to 77.78 trillion Korean won ($59.8 billion). ), as expected. Operating profit is expected to rise about 12% to 14.12 trillion Korean won, although it was the slowest rise in more than two years and missed expectations.

However, the results were “better than expected,” Daiwa Capital Markets analyst SK Kim told CNBC’s “Street Signs Asia” on Thursday.

Samsung’s earnings forecast led to a rally in other Asian semiconductor stocks on Thursday. Taiwan Semiconductor Manufacturing, one of the world’s largest chipmakers, rose 5%, while rival United Microelectronics Corporation rose more than 7%. South Korean SK Hynix was up almost 2%.

“It looks more like a relief from pre-results fears as investors oversold tech stocks,” Dale Gai, research director at Counterpoint Research, told CNBC via email.

Samsung chip strength

Samsung did not release a breakdown of results for each business segment. That will come later this month. But its components business accounts for nearly 60% of total operating profit and consists of chips that go into products ranging from servers in data centers to smartphones and laptops. Samsung also designs and manufactures semiconductors.

Sanjeev Rana, an analyst at CLSA, told CNBC he expects profits at Samsung’s semiconductor business to have risen 19% quarter-on-quarter. Rana said a better product lineup among Samsung’s so-called memory chips, as well as a stronger US dollar, likely helped the tech giant. Samsung’s chip sales are mostly in US dollars, but earnings are in Korean won.

Daiwa’s Kim said memory chips likely saw lower shipments, but the company’s design and foundry business likely saw a “double-digit operating profit margin” in the second quarter, which which helped spur the flea division. A foundry is a chip manufacturing facility through which a company can design and manufacture semiconductors for another company. TSMC is the largest foundry in the world.

A decline in sales of smartphones and televisions is expected to dampen the company’s results.

Uncertain future

Despite Samsung’s second-quarter chip strength, analysts expect near-term headwinds.

“Tech companies only saw a sharp deterioration in demand from the last month of 2Q and the weak demand has yet to run its course in my view,” Rana said in an email. .

Meanwhile, “chip inventory is at a very high level,” according to Counterpoint Research’s Dai. High levels of semiconductor inventories suggest that demand is weakening, which could also increase supply and put pressure on prices.

But Rana said some of the oversupply issues may ease.

“(A) lot of the bad news is also in price and for stocks like Samsung and Hynix, investors seem to be betting that the two companies could also announce memory production or investment cuts just a micron announced last week. last,” Rana said.

Shares of Samsung are down around 25% this year, while SK Hynix has fallen 28%.

Meanwhile, Samsung has faced delays in securing production equipment or semiconductors, which could also contribute to a slowdown in its memory chip production, Rana added.

Given these factors, Rana said, Samsung’s strategy of building its inventory of certain chips “is right,” adding that the market may be underestimating the challenges Samsung will face in memory chip production. in 2023.

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