Samsung: AI chip stock frenzy needs reality check

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The buzz around artificial intelligence kicked off a feeding frenzy. Investors placed big bets on the shares of the world’s biggest maker of memory chips. But a plunge in Samsung’s second-quarter earnings guidance suggests AI-driven growth will take longer than expected to drop into profits.

Operating profit is estimated to have plunged 96 per cent, to the lowest in 14 years. Sales fell by a larger than expected 22 per cent to Won60tn ($46bn).

Analysts expect the chips business to make an operating loss of at least Won3.3tn. It is likely to emerge as the only lossmaking unit in the group when the divisional breakdown is published later this month.

That will come as a surprise to investors who bid up Samsung shares by a quarter this year on the back of an expected surge in chip demand from AI-related industries. Samsung’s shares trade at 24 times forward earnings, a 40 per cent premium to regional peers.

It is true that Samsung makes chips that are crucial for the servers needed for generative AI. More chips are needed for more computing power. Yet that demand will not come soon.

The more urgent issue is the glut of chips left from frantic stockpiling during the global shortage of 2021. There is a lag between purchasing and using the chips. Customers now have large inventories.

Moreover, demand for smartphones and computers is dropping as remote working fizzles. That has meant lower sales forecasts and lower contract volumes. Chip prices have continued to decline, with some types down by as much as a fifth in the second quarter.

Long term, the investment proposition remains sound. Chip demand should increase from AI-related companies. Samsung is also the world’s largest maker of smartphones and TVs. These units provide a hedge other chipmakers lack. There is scope to cut steep marketing costs.

Samsung’s pricey valuation reflects AI hype. Fresh bets should wait until chip prices start to recover, which may not come until next year.