Samsung Q1 23 – Supercycle pt. X

Samsung semi goes into the red.

• Samsung reported preliminary results where profit fell by 95% as semiconductors in all probability has become loss-making which in turn triggered Samsung to finally cut its production.
• Q1 2023 revenues / operating profit were KRW63tn / KRW0.6tn way below consensus profit forecasts of KRW1.14tn and yet the shares rallied 4% after the news.
• This is par for the course for Samsung which is so closely followed in Korea that leaks are constant and often real expectations and official consensus are radically different.
• The share price was also undoubtedly impacted by the news that Samsung would finally follow its competitors and cut production.
• Samsung previously thought that it would be able to power through this downturn as it has before, but it looks to me as if pricing has fallen harder than it thought leading to larger losses and a rethink of its short-term strategy.
• Samsung is sticking with its long-term strategy of investing KRW300tn in semiconductors over the next 20 years which means very little as the company is currently spending way more than that in capex on an annualized basis.
• This is a further sign that the downturn that is starting in memory is steeper than it has been before which is why Samsung has been unable to power through it.
• This is a sign of the downward turn of the supercycle that I have been fretting about for 18 months (see here).
• As usual, when I get things right, I often get them right for the wrong reason and this case is no different.
• I predicted a surge in capacity would trigger the downturn but instead, it was inflation-triggered demand weakness that caused the cycle to turn.
• The big question now is what impact is capacity going to have.
• Semiconductor fabs are currently being built for geopolitical reasons and not in response to demand and still the output of these factories will have to be absorbed by the market when they come onstream.
• At the same time, I see China turning more towards the lagging edge meaning that supply at 45nm – 28nm may also jump upwards.
• Consequently, the impact of the capex splurge that has been experienced over the last couple of years has yet to be felt, and if it comes during 2023, then the cycle is likely to take another big leg down.
• A lot of this depends on what happens to interest rates and while I don’t think that they will go up much more, I can’t see them coming down either.
• Hence, I am not expecting a recovery in demand this year and expect that 2023 will look similar to 2022.
• By 2024, there is scope for a recovery which is going to be needed as there will be plenty of new fabs by then.
• Against this backdrop, one does not want to be holding the expensive end of the semiconductor sector nor the part of it that owns or is building capacity.
• The one exception to this is Nvidia which, while it is expensive, is currently riding the generative AI bubble which could easily drive both the shares and its valuation higher.
• Although TSMC and Samsung look very attractive from a valuation perspective, I prefer Qualcomm and MediaTek, both of whom have a similar valuation but own no factories.
• Owning factories can be problematic as this set of numbers clearly shows.