Last year, the surge in demand for global AI chips ignited investors' expectations for a corresponding increase in the earnings of chipmakers. However, Samsung, one of the giants in the industry, is expected to report its lowest earnings in 15 years. Operating profit is expected to decline 35% in the fourth quarter. This marks the sixth consecutive quarter of declining operating profit. Operating profit for the December quarter was 28 trillion won ($2.1 billion), bringing its full-year figure below 10 trillion won for the first time since 2008.
Part of the decline is due to global trends. With slower economic growth and high inflation intrusive, consumers are buying fewer electronic devices, including smartphones, PCs, and TVs. The long-term effects of the semiconductor industry recession, which worsened early last year, continue to affect overall chip demand.
But the problem is largely with the company. Samsung is lagging behind in two of the industry's hottest areas: chip contract manufacturing and AI chip-related technologies. In the foundry business, that is, in the business of manufacturing chips on behalf of other companies, TSMC's leading edge has expanded in recent years. According to Counterpoint Research, TSMC accounts for 59% of the global market share, while Samsung's share has fallen to just 13%.
The surge in demand for high-bandwidth memory (HBM) has led to new growth for memory chip manufacturers. For most of last year, Samsung's rival SK Hynix was the only company capable of mass-producing the latest generation of HBM3 products, which are used in NVIDIA's latest accelerators. This leading start puts SK Hynix in a competitive position in last year's AI chip boom, while Samsung is eager to catch up.
Despite the persistence of the average memory chips, earnings are showing weakness, raising concerns. In the past quarter, these *** accounted for about a tenth.
This is despite the fact that Samsung's share price has risen 25% over the past year and is trading at 24x future earnings, which is almost a 50% premium to TSMC. Foreign investors were the main driver of last year's chip frenzy. Now this is an overstatement. It will be increasingly difficult for Samsung to prove the value of its premium premium.