Samsung Electronics’ preliminary fourth-quarter operating profit significantly missed analyst expectations, impacted by increased expenses related to developing advanced chips for Nvidia. Rising research and development costs, coupled with investments in expanded manufacturing capacity for cutting-edge semiconductors, contributed to the lower than anticipated profit. Additionally, weakening demand for traditional memory chips used in personal computers and smartphones further impacted earnings.
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High-End Chip Production and Rising Costs Impact Samsung’s Bottom Line
For the three months ending December 31, the global tech giant anticipates an operating profit of 6.5 trillion won ($4.5 billion). This figure falls considerably short of the 7.7 trillion won projected by LSEG SmartEstimate. While the expected profit represents a 131% year-over-year increase, it marks a 29% decline compared to the already disappointing third-quarter results. Preliminary revenue is estimated at 75 trillion won, slightly below analyst forecasts.
Samsung’s challenges stem partly from its efforts to supply high-bandwidth memory (HBM) chips to Nvidia, a key component in artificial intelligence graphics processing units (GPUs). Currently, SK Hynix is Nvidia’s primary supplier of these specialized chips. Nvidia CEO Jensen Huang recently highlighted the need for Samsung to “engineer a new design” to meet their HBM requirements, acknowledging Samsung’s ongoing efforts to address this challenge. While Samsung reported progress in supplying HBM chips to Nvidia during its third-quarter earnings announcement, no further updates have been provided.
Analyst Greg Noh of Hyundai Motor Securities suggests that one-off costs, combined with weaker than expected chip and display earnings, likely contributed to the decline in Samsung’s profit. Despite the disappointing earnings announcement, Samsung’s stock price rose 3.4%. Analysts attribute this increase to the belief that the company’s challenges were already priced into the stock and are unlikely to worsen further.
Market Factors and Future Outlook for Samsung
Optimistic views suggest that chip demand may have reached its lowest point and smartphone demand in China could gradually recover, according to Lee Min-hee, an analyst at BNK Investment & Securities. However, concerns remain about Samsung’s ability to maintain competitiveness in its core businesses.
In contrast to Samsung’s performance, competitor SK Hynix is projected to report record earnings for the fourth quarter, with its stock price surging 23% last year. Samsung’s stock, on the other hand, experienced a significant 32% decline in 2022, considerably underperforming the broader market’s 10% drop. This highlights the intensifying competition in the semiconductor industry.
Samsung’s logic chip division, responsible for designing and manufacturing chips, also reported decreased earnings due to slowing mobile phone demand, reduced factory utilization rates, and increased research and development expenditures. Analysts estimate this division may have widened its losses to approximately $1.5 billion in the fourth quarter, compared to a loss of around $960 million in the previous quarter.
The company’s device business, encompassing mobile phones, televisions, and home appliances, also faced challenges. Lower sales of premium foldable phones and increased competition contributed to a decline in earnings for this division. While a weaker local currency typically benefits overseas earnings, slowing demand likely offset this positive impact.
Samsung will release its detailed fourth-quarter results on January 31st. This comprehensive report will provide further insights into the factors contributing to the company’s performance and its outlook for the future. The company’s ability to navigate the challenges of rising costs, intensifying competition, and evolving market demand will be crucial for its continued success.
