Samsung’s second-quarter earnings are ‘better than feared’ and fuel chip stocks

Samsung shares rose on Thursday, lifting Asian chip makers after the South Korean tech giant posted a “better than feared” second-quarter profit guidance.

The numbers eased investor concerns about rising inflation, deteriorating consumer demand and higher material costs for semiconductor companies, although analysts warned that the decline in demand may not have fully run its course.

Chip stocks have fallen this year amid a hurricane of concerns, including supply chain disruptions, a Russian-Ukrainian war, rising material prices and runaway inflation that threatens consumer demand for products like smartphones. Days ahead of Samsung’s earnings forecast, US chip maker Micron warned of decrease in demand for consumer goods.

This was 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), in line with expectations. Operating income is expected to rise by about 12% to KRW 14.12 trillion, although it was the slowest growth in more than two years and fell short of expectations.

However, the results were “better than feared,” Daiwa Capital Markets analyst C.K. told CNBC. Kim.Asian street signs“on Thursday.

Samsung’s earnings outlook pushed shares of other Asian semiconductor companies higher on Thursday. Taiwan Semiconductor Manufacturingone of the world’s largest chip makers grew by 5%, while its competitor United Microelectronics Corporation grew by more than 7%. South Korea SC Hynix was almost 2% higher.

“It’s more like a release of performance anxiety as investors oversold tech stocks,” Dale Guy, director of research at Counterpoint Research, told CNBC via email.

samsung chip strength

Samsung has not released a breakdown of the results for each business segment. This will happen later this month. But its components business accounts for almost 60% of total operating income and is made up of chips that power 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 that he expects Samsung’s semiconductor business to grow 19% quarter-on-quarter. Rana said a better product mix among Samsung’s so-called memory chips, as well as a stronger US dollar, likely helped the tech giant. Samsung’s chip sales are primarily in US dollars, but profits are reported in Korean won.

Daiwa’s Kim said that memory chips were likely facing a slowdown in shipments, but the company’s design and foundry business likely posted “double-digit operating profit margins” in the second quarter, which helped boost the chip division. A foundry is a chip manufacturing service through which a company can design and manufacture semiconductors for another company. TSMC is the largest foundry in the world.

Decreasing sales of smartphones and TVs are expected to dampen the company’s results.

Uncertain future

Despite the strengths of Samsung’s chips in the second quarter, analysts expect short-term headwinds.

“Tech companies saw a significant deterioration in demand only in the last month of the second quarter, and in my view, the weak demand has not yet played itself out,” Rana said in an email.

Meanwhile, according to Day of Counterpoint Research, “chip inventories are reaching a very high level.” High semiconductor inventories suggest weakening demand, which could also increase supply and put pressure on prices.

But Rana said some of the problems with oversupply could be resolved.

“(A) A lot of the bad news is also price-related, and for stocks like Samsung and Hynix, investors seem to be betting that the two companies may also announce memory or capex cuts, as Micron announced last year. week,” Rana said.

Samsung shares are down about 25% this year, while SK Hynix shares are down 28%.

Meanwhile, Samsung is facing delays in securing manufacturing equipment or semiconductors, which could also lead to a slowdown in memory chip production, Rana added.

Rana said that given these factors, Samsung’s strategy to build up inventories of certain chips is “correct,” adding that the market may be underestimating the challenges Samsung will face in manufacturing memory chips in 2023.