Samsung delivers almost tenfold increase in profit on back of AI chip demand

Samsung Electronics Co. Ltd. said today that its operating profit increased by almost tenfold in the first quarter from the same period a year ago, driven by a strong rebound in its semiconductor business, which makes the memory chips essential for artificial intelligence workloads.

The company reported revenue of 71.9 trillion won ($52.3 billion), up 13% from a year earlier, while its operating profit surged by 933%, to 6.61 trillion won. The numbers were better than Wall Street’s forecasts, with analysts having forecast revenue of just 71 trillion won and operating profit of 5.94 trillion won.

The numbers were in line with Samsung’s preliminary forecast earlier this month, and come in the wake of a yearlong decline that was triggered by global economic uncertainty. During fiscal 2023, Samsung’s operating profit fell to a 15-year low, with its semiconductor business posting a net loss of 14.9 trillion won.

In a statement, the company said its increased profit was driven by strong sales of its new flagship Galaxy S24 smartphone and higher prices for memory chips.

Samsung is the world’s top producer of dynamic random-access memory or DRAM chips, which sit at the heart of devices such as personal computers and smartphones. The chip business tends to be the company’s most profitable unit. It was responsible for generating 23.14 trillion won in sales and 1.91 trillion won in profit during the first quarter.

AI drives memory chip sales

The unit has benefited from a significant increase in the price of DRAM and NAND flash, another kind of memory chip. The price of both technologies has reportedly rebounded in recent months, following a yearlong slump. Analysts say the rise of generative AI has been a significant contributor to this growth.

Most data center AI chips these days include HBM memory, which is a more advanced type of DRAM that moves data to and from the processor faster than regular DRAM. That makes it especially useful for AI models, which need rapid access to massive amounts of information.

As a result, HBM memory is now in big demand. Last month, one of Samsung’s main rivals, Micron Technology Inc., said it had already sold all of the HBM chips it can manufacture this year, and has found buyers for most of next year’s supply too. It’s likely that Samsung is seeing similarly high demand for its HBM products.

Citibank analysts told CNBC that data storage is likely to become the major bottleneck in the AI supply chain, as semiconductor makers cannot manufacture the products fast enough to meet current demand. “We foresee Samsung Electronics as one of the key beneficiaries of SSD demand momentum for AI training,” Citi’s analysts said.

Daiwa Capital Markets analyst SK Kim told CNBC that memory chip prices will likely rise even more due to the recent earthquake in Taiwan, which temporarily impacted production at Micron and Taiwan Semiconductor Manufacturing Corp.’s facilities there.

Competition heats up

Samsung’s plans to accelerate memory chip production were recently boosted when U.S. President Joe Biden’s administration awarded the company a grant of up to $6.4 billion to fund the construction of a new fab in Taylor, Texas. Samsung’s rivals, including Micron and TSMC, are also hopeful of landing similar grants to boost their own presence in the U.S., as part of a funding initiative mandated by the CHIPS and Science Act.

However, Samsung still faces intense competition in the memory chip industry from rivals such as SK Hynix Inc., which is currently the world’s number two producer. Last month, that company announced it had begun mass production of a new HBM3E memory chip, which has higher bandwidth than any existing technology. It has already become the primary supplier of HBM3E chips to Nvidia Corp., whose graphics processing units power most AI workloads today.

Another rival is Japan’s Rapidus Corp., which recently received $3.89 billion in subsidies from the Japanese government so it can begin mass producing two-nanometer chips by 2027.

Samsung regains smartphone crown

Besides making memory chips, Samsung is also the world’s No. 1 smartphone maker, and that business is also seeing benefits from the growth of AI. The company said its MX and Networks business, which makes handsets and other mobile devices such as tablets and wearables, delivered 33.53 trillion won in revenue and 3.51 trillion won in profit during the quarter.

The unit was hit by lower demand for premium and midrange smartphones during the quarter, with shipments declining sequentially in terms of volume. That was to be expected, as the first quarter is traditionally sluggish.

However, Samsung said it managed to grow both its revenue and operating profit thanks to strong sales of its new flagship smartphone, the Galaxy S24 series, which comes with onboard generative AI features such as its new Circle to Search capability.

The company said smartphone shipments are expected to decline again in the second quarter, and in response it will apply its new generative AI experiences to additional flagship models across its range of tablets and wearable devices. For instance, the new Galaxy Ring will incorporate AI features, as will its next generation of smartwatches, the company said.

Samsung reportedly managed to regain its position as the world’s top smartphone seller, having briefly lost its crown to Apple Inc. in January. According to International Data Corp., “Samsung successfully reasserted itself as the leading smartphone provider” during the first quarter.

Samsung said it expects smartphone sales to rebound in the second half of the year thanks to stabilizing consumer sentiment and growing interest in its AI capabilities.

Photo: Samsung