Samsung Electronics Co., Ltd. delivered a quarterly performance that exceeded expectations, coupled with long-term supply agreements covering the world's top five hyperscale data center clients, further strengthening the bullish stance of Korea Investment & Securities (KIS).
In a research report released on July 31, KIS raised its target price for Samsung Electronics by 10% to 650,000 won, maintaining a "Buy" rating. The firm argues that the market continues to price Samsung Electronics using traditional cyclical stock logic, overlooking that long-term supply agreements are driving a shift in the memory business from a "cycle-driven" to an "order-driven" model. This transformation is expected to enhance earnings stability, forecast predictability, and valuation multiples, with current share prices deemed "severely undervalued."
In the second quarter, Samsung Electronics posted an operating profit of 89.5 trillion won, a 1,814% increase year-over-year, approximately 5.5% above market consensus estimates. KIS also raised its earnings forecasts for 2026 and 2027, and believes that a clear shareholder return policy further strengthens the company's medium- to long-term investment value.
Second-Quarter Results Exceed All Expectations, Semiconductor Business Drives Virtually All Profits
Samsung Electronics reported second-quarter revenue of 171.5 trillion won, up 28% quarter-over-quarter and 130% year-over-year. Operating profit reached 89.5 trillion won, a 56% sequential increase and a massive 1,814% year-over-year jump, surpassing the market consensus of 84.8 trillion won by approximately 5.5%.
Virtually all profits originated from the semiconductor business. According to KIS data, the semiconductor division's operating profit for the second quarter hit 89.2 trillion won, accounting for roughly 99.7% of the company's total operating profit. Within this, the memory business generated an operating profit of 91.5 trillion won.
Price improvements were a key driver of earnings growth. In the second quarter, average selling prices (ASP) for DRAM rose over 40% sequentially, while NAND ASPs increased by more than 60%. Additionally, the foundry business turned profitable after accounting for employee-related expenses.
Five-Year Contracts Change Industry Dynamics: From Cycle-Driven to Order-Driven
KIS believes the significance of these multi-year supply agreements extends beyond locking in future revenue; more importantly, they transform the long-standing supply-demand dynamics of the memory industry.
Historically, memory manufacturers have based capital expenditures on forecasts of market demand, subjecting the industry to persistent cycles of oversupply and price volatility. Under the long-term supply agreement model, capacity planning is more firmly grounded in customer orders, significantly enhancing operational stability and earnings predictability.
According to Samsung Electronics' plans, future long-term contracts are expected to cover approximately 60% to 70% of DRAM and NAND capacity, with the remaining 30% to 40% retained for spot market sales. This approach balances the stability of long-term orders with the flexibility to benefit from price increases in the open market.
KIS argues this indicates that Samsung Electronics is progressively building a new memory business model centered on order-driven operations.
HBM Not the Sole Focus, Emphasis on Long-Term Customer Partnerships
KIS also pointed out that Samsung Electronics is not currently pursuing aggressive expansion of HBM capacity alone. Instead, it maintains a balanced supply strategy between HBM and traditional DRAM.
Against a backdrop where HBM profitability is temporarily lower than that of conventional DRAM, the company dynamically adjusts production ratios between the two product types based on customer demand. It prioritizes long-term supply stability and customer relationships over short-term profit maximization.
The firm believes this further confirms that Samsung Electronics' memory business is shifting from a price-cycle-centric model to one driven by customer orders and long-term cooperation.
Valuation Remains Low, Shareholder Returns Provide Key Support
Despite significant fundamental improvements, KIS argues that Samsung Electronics' valuation remains low.
As of July 30, the company's stock price stood at 207,000 won. Based on book value per share (BPS) for 2027, the price-to-book ratio (PBR) was only about 1.3 times, placing it in a historically undervalued range.
KIS set its target price based on a PBR of 5.0 times the estimated BPS of 129,892 won over the next 12 months, arriving at a target of 650,000 won. Additionally, the firm raised its operating profit forecasts for 2026 and 2027 by 3% and 7%, respectively, reflecting improved earnings stability from long-term supply agreements and potential benefits from rising HBM prices in 2027.
Shareholder returns also serve as a valuation support factor. Samsung Electronics has reaffirmed its commitment to using 50% of annual operating free cash flow (FCF) as the basis for shareholder returns.
KIS believes there is a clear disconnect between the current market valuation and the company's earnings power, cash generation ability, and defined shareholder return policy. Rather than waiting for market sentiment to improve, it is more prudent to focus on the company's long-term intrinsic value.
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