Samsung's Semiconductor Profits Plunge 94% Amid AI Sector Struggles

Samsung Electronics reported a staggering 94% drop in profits for its semiconductor business in the second quarter, far below market expectations. This significant decline highlights the company's struggles in the lucrative artificial intelligence (AI) sector, where it is lagging behind competitors. In the high-end storage chip market, SK Hynix holds a dominant position, while Taiwan Semiconductor Manufacturing Company (TSMC) maintains a stronghold in the foundry segment.

The semiconductor division reported a quarterly operating profit of 4 trillion Korean won (approximately 2.88 billion USD), the lowest in six quarters and well below the average analyst estimate of 2.73 trillion Korean won. The company attributed the profit decline to sluggish demand for AI chips in the foundry business, particularly in the China market, due to U.S. export restrictions. This resulted in one-time inventory costs that significantly impacted profits.

Samsung had previously warned of weak preliminary operating profit and revenue data for the second quarter. The financial report showed that second-quarter revenue was 74.57 trillion Korean won (approximately 535.09 billion USD), a 0.67% increase year-over-year. Net income attributable to shareholders was 4.9 trillion Korean won (approximately 35.41 billion USD), a 48.83% decrease year-over-year, and below analyst expectations of 6.37 trillion Korean won.

Counterpoint Research Director MSHwang noted that Samsung's poor performance in the High Bandwidth Memory (HBM) sector was a significant factor in the disappointing results. He pointed out that Samsung's market share in the global HBM market fell from over 40% in the first quarter to 17% in the second quarter, placing it behind Micron Technology and in third position.

Samsung stated that it would actively respond to market demand for higher-density storage products. As demand recovers in the second half of the year, the company expects the operating loss in its foundry division to narrow. Recently, Samsung secured a 16.5 billion USD contract with Tesla to produce AI chips at its new factory in Taylor, Texas. This news boosted Samsung's stock price, contributing to a more than 20% increase in July, potentially setting a record for the best monthly performance in years.

To catch up with SK Hynix and Micron in the AI storage chip market, Samsung has increased its research and development investments and front-end production capacity. However, its latest products have yet to pass NVIDIA's certification, allowing SK Hynix to gain a significant advantage in the rapidly growing AI storage market. Meanwhile, Samsung is attempting to win major clients from TSMC to revive its foundry business, which has seen a significant decline in operating rates. TSMC has already started production in Arizona and expanded its U.S. capacity, while Samsung's Taylor factory completion has been delayed and is now expected to begin operations in 2026.

If the long-term cooperation agreement with Tesla is successfully implemented, it could help Samsung attract more customers and validate its 2-nanometer mass production technology. Investors are also watching whether Samsung can benefit from the resumption of H20 AI chip sales to China, where its relatively low-end HBM3 chips were previously paired with H20 chips.

Despite the mobile division achieving double-digit profit margins with steady sales of the Galaxy S25 smartphone, concerns about missing out on the first-mover advantage in the AI sector continue to weigh on the company. Samsung aims to maintain business growth momentum with the recent launch of the Galaxy Z Fold and Z Flip foldable smartphones, as well as the upcoming release of its first triple-fold smartphone later this year.