samsung warns that Q2 profits will plunge by 96% amid chip memory glut

South Korean tech giant Samsung Electronics is forecasting a massive 96% plunge in operating profits for the second quarter as an ongoing saturation in the memory chip market continues to impact the firm’s bottom line.

The preliminary estimate released by Samsung on Friday puts operating income for the April to June period at 600 billion won ($459 million), down from 14.1 trillion won a year earlier. It would mark the lowest quarterly profit reported by the company since the first quarter of 2009.

Revenue for the quarter is forecasted to decline by 22% to 60 trillion won as Samsung’s mobile business also experienced lackluster sales amid macroeconomic headwinds.

Why are Memory Prices Falling Off a Cliff?

The dismal outlook reflects the brutal impact of excess inventories of memory chips that have resulted in a sharp decline in the price of DRAM and NAND flash memory chips. Although Samsung and rivals have moved to cut supply in response, the glut persists and has kept dragging down profits.

Analysts say that, while chip prices fell at a slower pace in Q2 compared to Q1, the saturation and weak demand environment limited any meaningful improvement in Samsung’s chip business. However, there are signs that chip prices may stabilize later this year and even rebound in 2023 if supply adjustments are sufficient.

According to data from Statista, memory semiconductor revenues across the globe are expected to end the year at $111.62 billion resulting in a 17% drop compared to a year ago and a 27.4% retreat compared to 2022 levels, back when they hit a 3-year peak.

samsung market share in dram market

Meanwhile, by the third quarter of 2022, Samsung (SMSN.L) held a market share of over 40% of the DRAM market, followed by SK Hynix and the Micron Group. The firm also posseses a lower yet meaningful market share exceeding 30% in the flash memory global market.

During the first quarter of 2023, the DS Division – the segment where DRAM and NAND flash memory sales fall into – accounted for 21.5% of Samsung’s total top-line figure. In 2021 and 2022, that percentage stood at34.1% and 32.6% respectively.

Samsung Stock Barely Reacts to the News as Analysts Anticipated the Drop

Despite the poor results, Samsung shares were only down 0.5% as the profit forecast was largely in line with analysts’ estimates. Investors are focused on signs of a recovery in the second half of the year as the company maintains capital spending to strengthen its leadership position over the long term.

“Samsung’s aggressive investment in advanced process nodes will likely allow the company to take a large share of the still nascent but rapidly expanding market for high-performance AI and 5G applications” said CW Chung, an analyst at Nomura.

Also read: China Tells Its Tech Companies to Stop Buying Micron Chips

The outlook for a recovery later this year has also been bolstered by stronger comments from Micron Technology, which reported upbeat quarterly results last week and said the worst of the downturn appears to be over. Executives at Korean chipmaker SK Hynix have echoed that sentiment.

Samsung is also seeking to diversify its chip business beyond memory through acquisitions and investing in new technologies like AI semiconductors for servers. However, some analysts caution that any rebound in chip prices hinges on demand returning swiftly enough to soak up excess inventories, a scenario that remains uncertain.

As one of the world’s largest and most diversified technology companies, how Samsung navigates through the current memory chip glut and moves ahead with its long-term strategy will be closely watched. The next few quarters will be crucial in determining when profits may stabilize and begin to recover from current multiyear lows.