Samsung Electronics is projected to report a significant surge in its second-quarter operating profit, with estimates ranging from 84.3 trillion won ($55.1 billion) to 86 trillion won ($56.35 billion). This would represent an approximate 18-fold increase from the previous year and mark a third consecutive quarter of record operating profit. Revenue is forecast to reach 169 trillion won, driven primarily by booming demand for high-bandwidth memory (HBM), and conventional DRAM and NAND products, essential for artificial intelligence applications.
Despite these strong headline figures, some analysts caution that actual earnings could fall short if Samsung books a larger-than-expected provision for employee bonuses. A recent wage deal allocates 10.5% of the semiconductor division's operating profit to special bonuses, with some estimates suggesting cumulative bonus provisions could exceed 40 trillion won. For instance, some reports indicate that operating profit could surpass 100 trillion won before accounting for these provisions. This timing of accounting recognition for bonuses is a crucial variable for the second-quarter results. Investor sentiment, while generally positive, is also tempered by questions regarding the sustainability of AI memory's rapidly rising share of cloud service providers' capital expenditure, which is estimated at 52% this year and projected to exceed 70% next year.
The robust growth is fueled by an ongoing memory shortage, as AI demand continues to outpace supply. Average selling prices for DRAM and NAND rose significantly in the second quarter, with DRAM up 44% and NAND up 53% quarter-on-quarter, according to Citi Research. Nomura further expects commodity DRAM prices to rise 24% and NAND prices to increase 25% in the July-September quarter. This has driven a massive rally in memory chipmakers' shares, with Samsung Electronics, SK Hynix, and Micron soaring 158%, 273%, and 242% respectively this year, pushing their market valuations above $1 trillion.
However, the rally has faced turbulence from concerns over rising competition, potential overcapacity, and the long-term payoff from massive AI investments. JPMorgan noted that investors are seeking clearer evidence that breakthroughs in AI services will translate into faster growth in cloud computing and related AI revenues to justify the expanding share of AI infrastructure spending dedicated to memory. Analysts identify potential delays in AI infrastructure investment as the biggest risk to the current memory boom, although the memory market is expected to remain undersupplied through at least next year. Samsung's mobile business also faces cost pressures from rising memory prices, which may necessitate further price increases in the second half of the year.
Despite the mixed sentiments, sell-side analysts largely remain bullish on Samsung's stock, with an average price target implying a 52% upside over the next 12 months. Citigroup, for example, recently raised its target to 530,000 won from 460,000 won for Samsung. The company's stock is trading at 5.7 times its 12-month forward earnings, which is near its cheapest historical valuation, compared to 7 for Micron and nearly 24 for the broader Philadelphia Semiconductor Index, suggesting it remains an attractive option for investors.
