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Samsung’s Q2 earnings ‘higher than feared’ and spur chip stock rally

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Samsung shares rose on Thursday, dragging Asian chipmakers higher after the South Korean technology giant posted “higher than feared” earnings guidance for the second quarter.

The numbers assuaged investors’ concerns about rising inflation, deteriorating consumer demand and better material costs for semiconductor firms, though analysts cautioned that demand weakness may not have fully run its course yet.

Chip stocks have been hammered this 12 months amid a tornado of concerns, including supply chain disruptions, the Russia-Ukraine war, rising material costs and rampant inflation that threatens consumer demand for products like smartphones. A number of days ahead of Samsung’s earnings guidance, U.S. chipmaker Micron warned of softening demand for consumer products.

That set the backdrop for Samsung’s results.

But Samsung was up greater than 3% on Thursday after saying it expects second quarter revenue to rise 22% 12 months on 12 months to 77.78 trillion Korean won ($59.8 billion), in step with expectations. Operating profit is anticipated to grow around 12% to 14.12 trillion Korean won, though that was the slowest rise in greater than two years and missed expectations.

Nonetheless, the outcomes were “higher than feared,” SK Kim, analyst at Daiwa Capital Markets, told CNBC’s “Street Signs Asia” on Thursday.

Samsung’s earnings guidance brought on a rally in other Asia semiconductor stocks on Thursday. Taiwan Semiconductor Manufacturing, one in every of the world’s largest chipmakers, rallied 5%, while rival United Microelectronics Corporation was up greater than 7%. South Korea’s SK Hynix was nearly 2% higher.

“It’s more like a relief of the fears before the outcomes, as investors have oversold tech stocks,” Dale Gai, research director at Counterpoint Research, told CNBC via email.

Samsung chip strength

Samsung didn’t release a breakdown of results for every business segment. That may come later this month. But its component business accounts for nearly 60% of total operating profit and consists of chips that go into products starting from servers in data centers to smartphones and laptops. Samsung also designs and manufactures semiconductors.

Sanjeev Rana, analyst at CLSA, told CNBC he expects profit at Samsung’s semiconductor business to have risen 19% quarter on quarter. Rana said that a greater product mix amongst Samsung’s so-called memory chips, plus a stronger U.S. dollar, likely helped the technology giant. Samsung’s chip sales are mainly in U.S. dollars however it reports the profit in Korean won.

Daiwa’s Kim said that memory chips likely saw a decline in shipments, but the corporate’s design and foundry business probably saw “double-digit operating profit margin” within the second quarter, which helped boost the chip division. A foundry is a chipmaking service through which an organization may design and manufacture semiconductors for one more firm. TSMC is the world’s largest foundry.

A decline in smartphone sales and TVs is anticipated to be a drag on the corporate’s results.

Uncertain future

Despite Samsung’s chip strength within the second quarter, analysts expect near-term headwinds.

“Tech corporations saw a giant demand deterioration only from the last month of 2Q and weak demand has yet to run its course in my view,” Rana said in an email.

Meanwhile, “chip inventory is reaching a really high level,” in accordance with Counterpoint Research’s Dai. High inventory levels of semiconductors suggest demand is weakening, which could also increase supply and put pressure on prices.

But Rana said that a few of the excess supply issues could ease.

“(A) lot of the bad news can be in the value and for stocks like Samsung and Hynix the investors appear to be betting that the 2 corporations may additionally announce memory production or capex cuts only a Micron announced last week,” Rana said.

Samsung shares are down around 25% this 12 months, while SK Hynix has fallen 28%.

Meanwhile, Samsung has been facing delays in securing production equipment or semiconductors, which could also add to a slowdown in its memory chip production, Rana added.

Given these aspects, Rana said, Samsung’s strategy of increase its inventory of certain chips “is true,” adding that the market could also be underestimating the challenges Samsung will face on memory chip production in 2023.

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