Samsung Q1 24 – AI side effect

2024 starts with a predictable bang.

• Samsung reported results that beat expectations confirming that the boom in demand for AI is affecting more than just Nvidia, while a modest recovery in smartphones is likely to have added some icing to the cake.
• Q1 2023 revenues / operating profit will be around KRW71tn / KRW6.6tn which is broadly in line with the consensus revenue estimate of KRW71.8tn but ahead of the operating profit forecast of KRW5.4tn.
• As is customary, news of this beat had already leaked into the market and so Samsung’s shares had already priced this in.
• It looks almost certain that the main driver here is the semiconductor business and, taking the read from Micron, it is the memory business that has seen the most improvement.
• Three main factors are likely to have driven this result which are:
  • First, price: which is being driven both by an end to the inventory correction in consumer electronics as well as a recovery in demand.
  • Counterpoint Research has concluded that prices have increased by 7-10% in Q1 2023 and the outlook is that pricing will remain robust.
  • Second, high bandwidth memory (HBM) which is predominantly used in the data centre and is an essential component of the AI training and inference systems built by Nvidia and others.
  • HBM has been a weak spot for Samsung over the last few years and is a subsegment of memory where Micron has been faring particularly well.
  • HBM has yet to become a pure commodity where buyers can easily switch suppliers, meaning that providers will benefit from both substantial demand and robust pricing for as long as the AI hype bubble remains intact.
  • Samsung’s efforts to address this segment have been rewarded with qualification as a supplier to Nvidia as well as rapid growth in revenues.
  • Third, consumer electronics which is showing signs of stabilisation as well as a mild recovery in some sectors.
  • This is thanks to a slowdown in the rate of inflation and the prospect that interest rates may start falling sometime this year.
  • I think that cuts are actually unlikely but if the prospect of cuts allows consumers to feel better about the economy, then this is almost as good as the cuts themselves.
• Consequently, I would expect to see a modest recovery in revenue and profits at smartphones and a very large return to profitability at semiconductors when Samsung reports its full results on April 30^th.
• This combined with the results from Micron a couple of weeks ago point to a good year for semiconductor companies which are disproportionately exposed to AI and consumer electronics.
• Hence, key companies to keep an eye on this quarter will be Texas Instruments, Mobileye and NXP which are more exposed to the enterprise and industry which is now going through an inventory correction of its own.
• For 2024 one wants to be exposed to both AI (memory and other component suppliers would appear to be the best way of executing that) or consumer electronics both of which should have a good year.
• Qualcomm and Micron would appear to be 2 ways of achieving that and both are trading on a forward PER multiple or around 15x-16x.
• However, given Micron’s volatility, Qualcomm offers a better risk-adjusted return although it does not have immediate exposure to AI spending in the cloud.
• I own Qualcomm and would not be against Micron as earnings have improved lockstep with the share price and there is probably further to go.