Samsung's profits increase nearly 10 times on the back of demand for AI chips

Samsung Electronics today announced that operating profit for the first quarter increased nearly 10 times compared to the same period last year due to a strong recovery in its semiconductor business. Memory chips have become essential to artificial intelligence workloads.

The company reported sales of 71.9 trillion won ($52.3 billion), an increase of 13% year-on-year, and operating profit of 6.61 trillion won, an increase of 933%. The figures exceeded Wall Street expectations, with analysts expecting sales of just 71 trillion won and operating profit of 5.94 trillion won.

The figure is in line with preliminary forecasts published by Samsung earlier this month and follows a decline for the year caused by global economic uncertainty. Samsung's operating profit in fiscal 2023 fell to the lowest level in 15 years, with the semiconductor business posting a net loss of 14.9 trillion won.

The company said in a statement that the profit increase was driven by strong sales of its new flagship smartphone, the Galaxy S24, and higher prices for memory chips.

Samsung is the world's leading manufacturer of dynamic random access memory (DRAM) chips, which are at the heart of devices such as personal computers and smartphones. The chip business tends to be the company's most profitable division. In the first quarter, it generated sales of 23.14 trillion won and profits of 1.91 trillion won.

AI drives memory chip sales

The sector has benefited from significant price increases for DRAM and another type of memory chip, NAND flash. Prices for both technologies have reportedly recovered in recent months after a year of stagnation. Analysts say the rise of generative AI is a major contributor to this growth.

Most modern data center AI chips include HBM memory, a more advanced type of DRAM that moves data to and from the processor faster than regular DRAM. This makes it especially useful for AI models that need to quickly access large amounts of information.

As a result, HBM memory is now in high demand. Micron Technology, one of Samsung's main rivals, announced last month that it had sold all the HBM chips it could make this year and had found buyers for most of next year's supply. Samsung probably has similarly high demand for its HBM products.

Analysts at Citibank told CNBC that data storage is likely to become a major bottleneck in the AI ​​supply chain, as semiconductor manufacturers cannot produce products fast enough to meet current demand. Ta. “We expect Samsung Electronics to be one of the main beneficiaries of the SSD demand momentum for AI training,” Citi analysts said.

SK Kim, an analyst at Daiwa Capital Markets, told CNBC that memory chip prices have declined as recent earthquakes in Taiwan temporarily affected production at Micron and Taiwan Semiconductor Manufacturing facilities. is likely to rise further, he said.

Constellation Research's Holger Müller said the latest quarter reinforced that no matter how diversified Samsung becomes, its success will inevitably be determined by the fate of its semiconductor business. “Fortunately for Samsung, we had a very strong quarter, returning to profitability and boosting the company's revenue,” Moller said. “The demand for AI is driving the need for faster memory and storage, and that’s where Samsung plays a role.”

Competition intensifies

Samsung's plans to accelerate memory chip production recently received a boost after U.S. President Joe Biden's administration awarded the company up to $6.4 billion in grants to help build a new factory in Taylor, Texas. Samsung's rivals, including Micron and TSMC, also hope to win similar grants to increase their presence in the U.S. as part of funding programs mandated by CHIPS and the Science Act.

However, Samsung still faces stiff competition in the memory chip industry from rivals such as SK Hynix, currently the world's second-largest manufacturer. Last month, the company announced it had begun mass production of a new HBM3E memory chip with higher bandwidth than any existing technology. The company is already a major supplier of its HBM3E chips to Nvidia Corp., whose graphics processing units now power most AI workloads.

Another rival is Japan's Rapidus, which recently received a $3.89 billion subsidy from the Japanese government that will allow it to start mass producing 2-nanometer chips by 2027.

Samsung reclaims the smartphone throne

In addition to making memory chips, Samsung is also the world's number one smartphone maker, and its business is also benefiting from growth in AI. The company announced that its MX and Networks business, which manufactures mobile phones and other mobile devices such as tablets and wearables, generated revenue of 33.53 trillion won and profit of 3.51 trillion won in the quarter.

The segment was affected by lower demand for premium and mid-range smartphones in the quarter, with shipments decreasing from the previous quarter. This was to be expected as the first quarter has traditionally been weak.

However, Samsung said it was able to increase both sales and operating profit thanks to strong sales of its new flagship smartphone Galaxy S24 series, which is equipped with generative AI features such as the new Circle to Search feature.

The company said smartphone shipments are expected to decline again in the second quarter, and in response it will apply new generative AI experiences to additional flagship models across its lineup of tablets and wearable devices. For example, the new Galaxy Ring will have AI capabilities built into it, and the next generation of smartwatches will also have them.

Moller said Samsung has done a good job of maintaining smartphone profit growth, but the question is whether it can continue doing so this quarter, when sales are expected to slow further. “If Samsung's MX business unit continues to be profitable, it bodes well for an excellent outlook for the full year, and the next quarter's results will speak for themselves.”

One encouraging sign is that Samsung has reportedly managed to regain its position as the world's top smartphone seller after briefly being dethroned by Apple in January. According to his International Data Corp. report earlier this month, “Samsung successfully reasserted itself as a leading smartphone provider” during the quarter.

Samsung said it expects smartphone sales to recover in the second half of this year due to stabilizing consumer sentiment and growing interest in the company's AI capabilities.

Photo: Samsung