Company Reports

According to two South Korean memory suppliers’ earnings, DRAM prices rose by nearly 20% and NAND prices more than 30% sequentially in the March quarter, exceeding the forecasts we made three months ago. While memory suppliers continued to lower capacity utilization to reduce inventories, 1) demand for high-end memory, such as high bandwidth memory, remained robust and contributed to an improved product mix, and 2) smartphone manufacturers procured memory in anticipation of a memory price hike this year, creating a tight supply/demand situation.

Samsung Electronics has been a fantastic growth story as it has established itself as the clear global leader in the smartphone space during the past decade, following its success in becoming the global top manufacturer of flat panel TV in the 2000s. However, we do not identify an economic moat from its consumer electronics business, as these products are mature and difficult to differentiate, and are exposed to the tough competition from Chinese manufacturers. Unlike its competitor Apple, Samsung does not have an ecosystem that prevents users from switching to other brands, in our view.

Samsung Electronics guided for March quarter sales of KRW 71 trillion, up 11.4% year over year, and operating income of KRW 6.6 trillion or 9.3% operating margin, up from KRW 2.8 trillion or 4.1% operating margin in the December quarter. Although the preliminary operating income figure exceeded our forecast of KRW 5.3 trillion, which had assumed 16% sequential average selling price growth for DRAM and 20% sequential ASP growth for NAND, the preliminary numbers were not surprising, as Micron Technology had already announced in late March that DRAM and NAND ASPs for the February quarter were up in the high teens and over 30% sequentially, respectively. Samsung will release full results including segment breakdowns and hold a conference call on April 30. The focus of the results will be on whether the momentum of memory price increases will be maintainable in the second half of the year, which depends on current inventory levels and capacity utilization, as well as the improving product mix from increasing high-end memory such as HBD and DDR5.

Samsung Electronics has been a fantastic growth story as it has established itself as the clear global leader in the smartphone space during the past decade, following its success in becoming the global top manufacturer of flat panel TV in the 2000s. However, we do not identify an economic moat from its consumer electronics business, as these products are mature and difficult to differentiate, and are exposed to the tough competition from Chinese manufacturers. Unlike its competitor Apple, Samsung does not have an ecosystem that prevents users from switching to other brands, in our view.

Following Samsung Electronics’ December quarter earnings call, we reiterate our view that memory prices will continue to rise through 2024. Major memory suppliers significantly reduced capital spending last year to protect their cash flows, and while they plan to increase spending this year from a low base, most will be allocated to high-end products such as DDR5 and HBM3/HBM3E, which consume more wafers. As a result, we forecast that industrywide supply bit growth will be limited amid a solid recovery in memory demand this year, and we expect memory prices to continue to rise in 2024 due to the tight supply. Based on the updated memory outlook, we raise our fair value estimate for Samsung Electronics to KRW 85,000 per share and USD 1,610 per GDR from KRW 80,000 and USD 1,480, and our fair value estimate for SK Hynix to KRW 147,000 per share from KRW 140,000. We believe that Samsung’s shares are slightly undervalued, while SK Hynix's shares are fairly valued.

Samsung Electronics has been a fantastic growth story as it has established itself as the clear global leader in the smartphone space during the past decade, following its success in becoming the global top manufacturer of flat panel TV in the 2000s. However, we do not identify an economic moat from its consumer electronics business, as these products are mature and difficult to differentiate, and are exposed to the tough competition from Chinese manufacturers. Unlike its competitor Apple, Samsung does not have an ecosystem that prevents users from switching to other brands, in our view.

Samsung Electronics guided December-quarter revenue of KRW 67 trillion, down 4.9% year over year, and operating income of KRW 2.8 trillion or 4.2% operating margin, up from KRW 2.4 trillion or 3.6% operating margin in the September quarter. This was below our expectation of KRW 3.7 trillion or 5.4% operating margin. Although the firm doesn't disclose the segment breakdown, we believe that the shortfall is due to the lower profitability of nonmemory businesses, such as smartphones and foundries, while we believe the memory business has bottomed out and is on the road to recovery.

Following solid financial results and earnings calls confirming that the memory industry has bottomed out as expected, we have made minor adjustments to our earnings forecasts for South Korean memory suppliers. Our fair value estimate per share for Samsung Electronics is maintained at KRW 80,000, while the fair value per GDR is revised to USD 1,480 from USD 1,560 due to currency movements. Our fair value estimate for SK Hynix is maintained at KRW 140,000 per share. Although inventory levels peaked in mid-2023, they are still at the high levels, especially for NAND. As a result, memory suppliers are expected to continue maintaining lower capacity utilization and to remain cautious about increasing production capacity next year, which should be favorable for memory prices due to limited supply. We believe that the shares of Samsung Electronics are undervalued. SK Hynix’s shares are on the borderline between 3-star and 4-star territory and have about 18%-20% upside to our fair value estimate.

Samsung Electronics has been a fantastic growth story as it has established itself as the clear global leader in the smartphone space during the past decade, following its success in becoming the global top manufacturer of flat panel TV in the 2000s. However, we do not identify an economic moat from its consumer electronics business, as these products are mature and difficult to differentiate, and are exposed to the tough competition from Chinese manufacturers. Unlike its competitor Apple, Samsung does not have an ecosystem that prevents users from switching to other brands, in our view.

Narrow-moat Samsung Electronics’ preliminary numbers for the September quarter were slightly below our July forecasts, which we believe was due to the weaker memory price and capacity utilization assumptions, but were largely in line with what we expected from Micron Technology’s August-quarter earnings results reported in late September. As a result, we maintain our view that memory prices will rise in 2024 due to the tight supply-demand as memory suppliers will remain disciplined in reducing excess inventory in the supply chain. We believe Samsung’s stock is undervalued, and favorable memory prices and news flow on generative AI server investments could drive the stock price in the near term.

Samsung Electronics has been a fantastic growth story as it has established itself as the clear global leader in the smartphone space during the past decade, following its success in becoming the global top manufacturer of flat panel TV in the 2000s. However, we do not identify an economic moat from its consumer electronics business, as these products are mature and difficult to differentiate, and are exposed to the tough competition from Chinese manufacturers. Unlike its competitor Apple, Samsung does not have an ecosystem that prevents users from switching to other brands, in our view.

We have revised our earnings forecasts for two South Korean memory suppliers and raise the fair value estimate for Samsung Electronics to KRW 80,000 per share from KRW 78,000 and to $1,560 per global depositary receipt from $1,470. We've raised the fair value estimate for SK Hynix to KRW 140,000 from KRW 120,000. The reason for the larger increase in SK Hynix’s fair value is that the contribution of increasing investment in artificial intelligence servers is more significant. Excluding the AI server investment, memory supply and demand are largely in line with our expectations, and we maintain our view that memory prices will bottom out by the end of this year and continue to rise through 2024.

Samsung Electronics has been a fantastic growth story as it has established itself as the clear global leader in the smartphone space during the past decade, following its success in becoming the global top manufacturer of flat panel TV in the 2000s. However, we do not identify an economic moat from its consumer electronics business, as these products are mature and difficult to differentiate, and are exposed to the tough competition from Chinese manufacturers. Unlike its competitor Apple, Samsung does not have an ecosystem that prevents users from switching to other brands, in our view.

Samsung Electronics' preliminary numbers for the June quarter were slightly below our forecasts, but there were no real surprises, as we had predicted in advance based on Micron Technology’s earnings results that actual memory prices would be lower than our assumptions. Meanwhile, we retain our view that memory price erosion would be less pronounced in the September quarter and would bottom out in the December quarter as supply/demand tightens. On the demand side, we believe that the inventory digestion for smartphones and PCs is largely complete, so customer procurement should return to normal levels. On the supply side, we believe that the utilization cut implemented by all memory suppliers will be more effective in the September quarter. We believe tight supply will persist throughout 2024, as capacity expansion for this year will be marginal, as memory suppliers—especially SK Hynix and Micron—are prompted to cut capital expenditure in 2023 to protect their cash and profitability. As a result, we remain optimistic about memory prices in 2024. While we currently have a 3-star rating on both Samsung Electronics and SK Hynix due to the recent rally, we believe the outperformance is likely to continue in the near term, supported by the continued rise in memory prices and news flow on artificial intelligence server investments.

The March-quarter earnings results of South Korean memory suppliers, Samsung Electronics and SK Hynix, were largely in line with our expectations, supporting our view that memory prices will bottom out in the second half of this year and then rise throughout 2024.

Samsung Electronics has been a fantastic growth story as it established itself as the clear global leader in the smartphone space during the past decade, following its success in becoming the global top manufacturer of flat panel TV in the 2000s. However, we do not identify an economic moat from its consumer electronics business, as these products are mature and difficult to differentiate, and are exposed to the tough competition from Chinese manufacturers. Unlike its competitor Apple, Samsung does not have an ecosystem that prevents users from switching to other brands, in our view.

Although Samsung Electronics’ preliminary March quarter numbers were slightly below our forecasts and the PitchBook consensus, there were no major surprises, given Micron Technology’s February quarter results reported last month, which showed an operating loss due to the severe memory price erosion and inventory write-downs. We do not expect Samsung’s guidance itself to have a significant impact on memory stocks, but based on our latest memory price forecasts, we lower our 2023 and 2024 operating income forecasts for Samsung to KRW 11.5 trillion and KRW 33 trillion—from KRW 16.5 trillion and KRW 40 trillion; and for SK Hynix, we revise them to KRW 9.45 trillion loss and KRW 3.2 trillion profit—from KRW 6.4 trillion loss and KRW 4.25 trillion profit, respectively. While we expect suppliers to suffer from oversupply throughout 2023 due to high inventory levels, we think a more severe undersupply will occur in 2024 when demand recovers due to limited capacity expansion in 2023. As a result, our earnings forecasts from 2025 to 2027 remain largely unchanged. Therefore, we maintain our fair value estimates of KRW 120,000 for SK Hynix and KRW 72,000 for Samsung Electronics (adjusted to USD 1,380 per GDR due to currency movements).

Samsung Electronics has been a fantastic growth story as it established itself as the clear global leader in the smartphone space during the past decade, following its success in becoming the global top manufacturer of flat panel TV in the 2000s. However, we do not identify an economic moat from its consumer electronics business, as these products are mature and difficult to differentiate, and are exposed to the tough competition from Chinese manufacturers. Unlike its competitor Apple, Samsung does not have an ecosystem that prevents users from switching to other brands, in our view.

After updating our earnings forecasts, we revise our fair value estimates for SK Hynix to KRW 120,000 from KRW 133,000, and for Samsung Electronics to KRW 72,000 from KRW 73,000 per share and to USD 1,440 from USD 1,300 per U.S. GDR (raised due to currency movement). Memory suppliers are suffering from the largest supply-demand gap since 2008 and inventory levels are still high. As a result, we expect both Samsung Electronics’ memory division and SK Hynix to post operating losses in 2023 which are much lower than our previous forecasts. Meanwhile, we maintain our view that the supply-demand gap for memory will be at its widest in these two quarters and will gradually improve toward the end of the year. As a result, we believe that the price erosion should be at its worst in the December quarter and will be less pronounced in the following quarters. We believe memory suppliers’ shares are undervalued as we expect their operating margin to bottom out in the March quarter and continue to improve until at least mid-2024.

Samsung Electronics has been a fantastic growth story as it established itself as the clear global leader in the smartphone space during the past decade, following its success in becoming the global top manufacturer of flat panel TV in the 2000s. However, we do not identify an economic moat from its consumer electronics business, as these products are mature and difficult to differentiate, and are exposed to the tough competition from Chinese manufacturers. Unlike its competitor Apple, Samsung does not have an ecosystem that prevents users from switching to other brands, in our view.