Samsung Q2 2023 – Supercycle pt. XII

Samsung echoes Micron.

• Samsung reported the worst set of preliminary results for many years but critically, they were slightly better than expectations and show a similar pattern to Micron where the decline in demand appears to be stabilising.
• Q2 2023 revenues / operating profit is expected to be around KRW60tn (down 22% YoY) / KRW600bn down from KRW14.1tn in Q2 2022.
• Q2 2023 operating profit was slightly ahead of expectations (KRW555bn) and was almost entirely due to falling margins at Samsung’s semiconductor business.
• Given the weakness in consumer goods and electronics end markets, I expect that there has been some weakness there as well, but the main event almost certainly has been semiconductors.
• Here, the fixed-cost nature of this business means that profitability swings very widely across the cycle which is currently in a downturn driven by high interest rates and an inventory glut.
• Like Micron and all other semiconductor suppliers, Samsung suffers twice as much as device makers when demand is weak and inventory has to be wound down and it is these impacts that we are seeing now across the sector.
• One bright spot is AI where demand for large language models (LLMs) is driving demand for DRAM memory in the data centres where they run.
• LLMs running in the cloud require a disproportionately large amount of DRAM to execute compared to other software that runs in the cloud.
• This is because to execute efficiently, LLMs need to be loaded into DRAM so that requests can be processed within a reasonable period of time.
• Samsung is seeing strong demand for these product lines as every man and his dog wants to build an LLM to enhance their business.
• There is no sign of the generative AI mania cooling and so this should help Samsung to offset the continuing weakness in its much larger product lines.
• A lot will depend on what Samsung says when it reports its full Q2 2023 results later this month, but every indication is that it will echo Micron’s comments and state that while things are not getting better, they have stopped getting worse.
• China’s failure to deliver the much hoped-for (by me) economic recovery in H2 2023 adds further weight to the expectation that there is no upturn in sight in end demand.
• Against this backdrop, I think that the cheaper end of the semiconductor sector will rally more than those already priced for AI perfection.
• Samsung is not expensive at these levels, but I continue to be nervous with regard to semiconductor companies that own factories.
• This is why I prefer the cheaper end of the fabless semiconductor industry where Qualcomm and MediaTek have more scope to outperform from here than the likes of Nvidia and AMD during H2 2023.