Samsung Q2 2022 – Supercycle pt. VI.

Samsung triggers a relief rally.

• Samsung reported results that broadly met expectations and I suspect that Samsung will be taking share in the coming quarters which would begin to explain the discrepancy between these numbers and Micron’s guidance.
• The semiconductor sector in Asia rallied strongly indicating that it has been short-term oversold on fears of a looming recession.
• Samsung expects that its Q2 2022 revenue / operating profit was KRW77tn / KRW14tn compared to estimates of KRW77.6tn / KRW14.6tn against widespread fears of a miss similar to that experienced by Micron (see here).
• It is important to note that Micron’s FQ3 2022 results were broadly in line with expectations and that it was the guidance for the coming quarter that caused the consternation.
• These numbers only refer to Samsung’s calendar Q2 (Micron FQ3) and the company has yet to say anything about the coming quarter and it will do when it provides its full Q2 2022 results later this month.
• However, it is very rare for Samsung’s share price to react to its results on the day, as the Korean market is quite porous and a view on which way the results and guidance have gone tends to leak out and be priced in ahead of their disclosure.
• Hence, I suspect that rumour of steady guidance for the coming quarter and rest of 2022 is leaking out into the market and it is this that is being priced into Samsung’s shares which are up over 3% today.
• This would be in stark contrast to what Micron had to say and I suspect that the difference will be down to shifts in market share.
• Samsung is the biggest and the best at making both DRAM and NAND and as a result, it can make profits at levels where everyone else is losing money.
• Hence, it may well be Samsung that is taking on the orders that Micron has declined resulting in a market share shift.
• This would indicate that Micron’s guidance is not entirely due to a sudden collapse in demand but it does still indicate the memory is moving from capacity-constrained to oversupply.
• This makes sense as inventory building by device manufacturers has already begun to stop and rising interest rates and inflation will almost certainly hurt demand.
• Consequently, I still think we are looking at the top of the semiconductor cycle and remain cautious as to whether Micron’s expectation that demand will bounce back in 2023 will come to pass.
• There is no sign of inflation going away as the puny interest rate rises (which are already causing so much damage) have no chance of bringing inflation under control as real interest rates remain deeply negative.
• As capacity comes on stream over the short to medium term, demand may continue to be soft meaning that when capacity does come online, the supercycle that the semiconductor sector has enjoyed will sharply reverse.
• The fabless semiconductor companies are likely to fare the best given that they don’t own fabs that will need to be filled and so I would continue to prefer the cheaper, more defensive end of the sector.
• Here I continue to prefer Qualcomm and MediaTek both of which may suffer from demand weakness but critically they will suffer less than average.
• TSMC is also pretty cheap on a forward PER basis but if demand really weakens, it may suffer more than the fabless sector and it is also spending a fortune on capacity expansions.
• My caution is growing although some segments like automotive semiconductors remain supply-constrained and are likely to remain strong for the rest of the year.