Samsung’s Q3 profit seen jumping nine-fold, but chip margins may be flat

Samsung Electronics anticipates a near nine-fold increase in its third-quarter operating profit, primarily fueled by robust demand for AI technology. Nonetheless, analysts have revised their forecasts downward by nearly 8% since the conclusion of August. Despite a decline in the prices of memory chips and an appreciating South Korean won, the company is projected to generate operating profit of 106.1 trillion won ($79.1 billion) for the July-September quarter.

Samsung's LSEG SmartEstimate, derived from forecasts of 21 analysts, has decreased by 7.7% since late August. The company's fourth consecutive quarter of record operating profit highlights a persistent memory shortage as AI infrastructure demand surpasses supply growth. Chipmakers anticipate this shortage to continue into next year and possibly through 2028.

However, the speed of price increases moderated in the third quarter, raising concerns about possible peak chip margins and the sustainability of the AI spending surge. Samsung plans to unveil preliminary Q3 results on Thursday, with comprehensive data released in late October. The reduction in memory prices is closely monitored by investors following a more than year-long rally driven by AI demand.

This rally propelled the world's largest memory producers, including Samsung, SK Hynix, and Micron, to record profits and margins. Higher chip prices have contributed to increased smartphone and consumer electronics costs, dampening demand. Simultaneously, long-term supply agreements between chipmakers and customers have limited price gains in exchange for assured supply.

TrendForce predicts conventional DRAM contract prices to climb by 10% to 15% in the fourth quarter compared to the previous quarter, a slowdown from a second-quarter surge of approximately 60%. Although the market is still in a tight supply position, the rate of price growth is anticipated to decelerate, as Avril Wu, senior vice president for research at TrendForce, explains.

Suppliers are cautious about excessive price hikes that could harm demand across a broad range of consumer electronics. In July, Samsung stated its intention to secure long-term contracts covering around two-thirds of its memory output, joining rivals in seeking to mitigate exposure to the industry's booms and busts. US rival Micron suggested the chip market could be tighter in 2027 and 2028 than in the current year, although it anticipates a slight dip in gross margin to 86.3% in the present quarter, from 87%, mainly due to employee compensation expenses.

Samsung's memory-chip operating profit margin is forecast to remain steady at 76% in the third quarter, unchanged from the previous quarter, according to SK Securities analyst Han Dong-hee. The company also faces mounting competition from Chinese firms, which mainly focus on lower-end products but benefit from the AI-driven memory scarcity.

Our industry checks reveal that an increasing number of original equipment manufacturers (OEMs) and original design manufacturers (ODMs) are adopting Chinese DRAM and NAND products. Currency fluctuations pose another challenge, as the won surged by 14.3% against the dollar in the third quarter, marking its biggest quarterly gain since early 1998.

This strengthens the value of overseas earnings when repatriated. Samsung shares have dropped about 25% since a June record high but remain over double their level at the beginning of the year. The company is expected to expand sales of high-bandwidth memory (HBM) chips, a crucial element for AI data centers, as it narrows the gap with market leader SK Hynix.

Samsung's HBM market share is projected to reach 34% this year from 20% last year, according to J.P. Morgan estimates, while SK Hynix's share is forecast to drop to 46% from 60%.