Foreign capital frenzy, stock prices rise 30% this year, but profits plummet 95%. Can Samsung Electronics handle the "AI era"?

The popularity of generative AI has led investors to bet on not only TSMC but also another chip manufacturer, Samsung Electronics. However, Samsung Electronics may struggle to catch up with TSMC in response to this challenge.

According to Credit Suisse, foreign investors have purchased over $8 billion worth of Samsung Electronics stocks this year, marking the largest influx of foreign investment since 2000 for the company.

With this record-breaking buying spree, Samsung Electronics' stock price has surged nearly 30% year-to-date. Meanwhile, NVIDIA, the biggest winner in the AI boom, has seen its stock price skyrocket by 200% this year.

However, despite the impressive stock performance, Samsung Electronics' operating profit for Q1 2021 plummeted by 95% to only around $479 million.

Apart from the weakened demand for electronic products, Samsung Electronics explained that part of the profit decline was due to the $7.4 billion spent on its chip business. The company is expanding production at its chip factories located 40 kilometers south of Seoul in Pyeongtaek City and in Texas, USA.

In Q1 2021, Samsung Electronics' capital expenditure reached 10.7 trillion Korean won (approximately $8.24 billion), setting a record high for the first quarter.

Samsung Electronics plans to establish a "megacluster" for chip manufacturing in South Korea worth $230 billion over the next 20 years through collaboration with the government.

Sanjeev Rana, a senior analyst at Credit Suisse, pointed out that while most chipmakers announced investment cuts amid declining memory chip prices, Samsung Electronics is the only major memory chip manufacturer to announce increased investment for capacity expansion.

However, it should be noted that as Samsung Electronics unveils its ambitious plans, the gap between this South Korean chipmaker and its main competitor, TSMC, is widening.

Surpassing or Being Surpassed?

One fact is that TSMC's global market share is continuously growing, while Samsung Electronics is losing its existing customers. In May of this year, Kyung Kye-hyun, the president of Samsung Electronics' semiconductor division, admitted in a conversation with college students that the company is "lagging behind" TSMC by up to two years. Following that, he vowed that Samsung Electronics' memory chips would become the "core" of AI supercomputers by 2028:

"We can surpass TSMC within five years."

However, according to market research firm Counterpoint Research, TSMC accounts for about 60% of the total revenue in the global foundry business, while Samsung Electronics only accounts for 13%. This gap has been widening since 2021, and some of Samsung Electronics' customers, including NVIDIA, have already shifted their business to TSMC.

In addition, SK Hynix, another competitor of Samsung Electronics in the storage chip market, also gained favor from NVIDIA last year. NVIDIA holds about 50% of the high-bandwidth memory (HBM) market share, while Samsung Electronics' share is 40%.

SK Hynix's stock price has risen by more than 50% this year, surpassing the increase of Samsung Electronics.

Although Samsung Electronics has stated that they have started providing HBM to "key customers" that can compete with SK Hynix and have announced the launch of the next generation this year, analysts still believe that Samsung Electronics has not fully caught up in this technological field.

Nam Hyung Kim, an analyst at Arete Research, wrote in a report in February of this year:

"Samsung Electronics' lag in HBM technology may be a sign of a broader problem. Micron Tech has also surpassed Samsung Electronics in DRAM and NAND flash technology.

The problem with Samsung Electronics is that they always want to be big. They have spent so much money, but they are no longer the leaders in technology."