Samsung Q3 24 – A Note 7 Moment.

Problems look temporary and create an opportunity

• Samsung has reported good results but made a rare apology to investors for its continued inability to catch up with its competitors in high bandwidth memory (HBM) which is critical for training large language models raising concerns that its dominance of memory may finally be flagging.
• This weakness has caused an exodus from the stock which has left the PER at 11.1x 2024 and 8.7x 2025 which is starting to look very attractive if one thinks that Samsung will fix this problem.
• Q3 2024 preliminary revenues / operating profit were KRW79tn / KRW9.1tn, somewhat behind the consensus of KRW82.0tn / KTW10.3tn.
• At the same time, Mr Young-Hyun Jun the new head of Samsung Semiconductor apologised to investors, admitted that the semiconductor business is in crisis and took responsibility for the shortcomings and promised to fix them.
• The problem is relatively simple in that Samsung has been behind SK Hynix and Micron in HBM for some time and is still struggling to catch up.
• One of the big problems with training LLMs is that one needs many chips all working together to get the job done in a reasonable time frame meaning that a great deal of co-ordination is required.
• Moving data in and out of memory has been one of the core bottlenecks which is why HBM has suddenly shot to prominence with the emergence of LLM-powered AI services.
• This sudden jump in demand obviously caught Samsung unawares and even though it has made progress during Q3 2024, it remains behind both SK Hynix and Micron.
• The good news is that Samsung has qualified its HMB3E chips with Nvidia for use in the data centres but my understanding is that this is for the 8-layer chip rather than the more advanced 12-layer chip that SK Hynix and Micron are already supplying.
• This is a very unusual state of affairs because Samsung has ruled the memory industry for many years and now its dominance in memory is being questioned for the first time in a long time.
• Unsurprisingly, the fickle, AI-obsessed market has hammered the share price which is down almost 30% from its high in July creating an opportunity.
• There is no doubt that Samsung is going through a rough patch like it did when its Galaxy Note 7 smartphones started catching fire but over the years, Samsung has surprised me with its resilience and its ability to fix problems like these.
• Consequently, when I look at the stock’s valuation at less than 10x PER for 2025, its historical global dominance of many areas of semiconductors and consumer electronics and its proven ability to deal with adversity makes me want to buy the shares.
• I last owned Samsung in 2018 and sold it just before the pandemic really kicked in and I think it is probably time to have another look at the fundamentals.