AI Competition and Foundry Woes Cost Samsung $122 Billion

A few months ago, Samsung appeared poised to benefit from the global surge in artificial intelligence (AI), experiencing a significant increase in profits and reaching record-high stock prices. However, concerns have grown regarding Samsung's competitive position in the AI memory sector against SK Hynix and its inability to outpace TSMC in the semiconductor manufacturing space. Consequently, the company's stock has dropped 32% since its peak on July 9, resulting in a market capitalization loss of $122 billion—more than any other semiconductor manufacturer worldwide.

In response to these challenges, Samsung has committed to reform measures aimed at regaining its competitive edge. Yet, international fund management firms, including Baillie Gifford and Janus Henderson Group, remain skeptical about the company's prospects for a quick turnaround. Since late July, overseas investors have net sold approximately $10.7 billion in Samsung shares.

While smartphones and consumer electronics continue to represent the majority of Samsung's sales, semiconductors have historically been its most profitable segment. Amid the ongoing crisis in the chip business, Samsung issued a rare apology to investors in early October for its disappointing performance.

The narrative surrounding Samsung underscores that AI has become a pivotal factor in determining the winners and losers in the current chip industry. NVIDIA has emerged as one of the world's largest companies, while TSMC remains a key manufacturer for NVIDIA and Apple-designed chips, witnessing a market capitalization increase of over $330 billion this year.

Samsung's situation has rapidly deteriorated. Following a reported 15-fold increase in operating profit for the June quarter, the company's stock briefly hit a historical high. Optimism lingered among investors that Samsung could secure more business by supplying high-bandwidth memory (HBM) to complement AI processors. However, shortly after announcing the commencement of mass production in early October, Samsung acknowledged delays in the release of its latest generation HBM chips, dampening these hopes. Concurrently, U.S. rival Micron Technology has ramped up its HBM investments and reported strong product demand.

Young Jae Lee, a senior investment manager at Baillie Gifford, stated, "Samsung is losing its technological leadership in the semiconductor industry." He emphasized that regaining this position is inherently challenging in the short term and indicated that the firm has been reducing its stake in Samsung.

Beyond its lag in AI memory, Samsung has struggled for years to close the gap with TSMC in the foundry business, investing heavily in the effort. Similar to Intel, the South Korean company has faced difficulties in expanding its outsourced chip manufacturing business and is now implementing layoffs and other measures to curb losses.

Samsung plans to hold a conference call after releasing its third-quarter financial results on October 31. Amid ongoing uncertainty in the company's leadership, a management reshuffle is anticipated before the year's end, which will be a focal point for stakeholders.

Lee Jae-Yong, the grandson of Samsung's founder, was appointed as executive chairman two years ago after being acquitted of stock manipulation charges in February. Three months later, the company appointed veteran memory chip executive Cheon Yong-hyun as the new head of its semiconductor division.

Given the stock price valuation nearing historical lows and technical indicators signaling oversold conditions, Samsung's management may need to work diligently to regain investor confidence.