For Samsung, Being No. 2 In Chips Isn't a Bad Deal -- Barron's

By Craig Mellow

Samsung Electronics is going big in Texas -- real big. The South Korean tech giant got a U.S. Commerce Department Chips Act grant of up to $6.4 billion this week, to fuel investment north of $40 billion just outside Austin -- if all goes according to plan.

Samsung's U.S. ambitions echo those of rival Taiwan Semiconductor Manufacturing in neighboring Arizona. But investors are treating the two companies much differently.

Samsung has been the laggard as artificial-intelligence fever sweeps the global semiconductor industry. Its shares have gained 20% over the past year, compared with a 60% jump for TSMC, which dominates the manufacture of so-called logic chips. Samsung's chief competitors in memory chips, fellow Korean SK Hynix and Idaho-based Micron Technology, have both nearly doubled.

There's good reason for the underperformance. Samsung still runs a distant second to TSMC in logic, despite pouring some $50 billion into its foundries over the past few years. It ceded the lead in cutting-edge high-bandwidth memory to SK Hynix, which is supplying the most advanced designs of industry darling Nvidia.

"Samsung is firmly in last place in HBM technology and well behind TSMC in logic," says Dylan Patel, chief analyst at SemiAnalysis.

Some investors like Samsung stock anyway.

Cutting edge isn't everything for a company pushing $200 billion in annual revenue. Samsung's bread-and-butter DRAM and NAND memory chips should rebound this year after a glut that cratered prices up to 70% in 2022-23, says James Lim, a partner at Dalton Investments.

"Memory will allow Samsung to continue outgrowing the broader semiconductor market," echoes Andrew Keiller, an emerging markets investment specialist at Baillie Gifford. "We see 8% to 10% revenue growth at slightly improving profitability."

Governance at Samsung also looks better than average for a Korean chaebol, though that's admittedly a low bar. Executive Chairman Lee Jae-yong (anglicized as Jay Y. Lee), who still calls the shots for the founding family, was acquitted of his latest criminal charges -- manipulating stock prices in a 2015 subsidiary merger -- in February.

Lee and his sisters are in their 50s, young enough not to be nudging Samsung's stock price lower to minimize Korea's 60%-ish inheritance tax, a common chaebol strategy, Lim says. On the contrary, they have pledged company shares in a settlement to pay their own taxes. They benefit as the stock rises.

Leads can change hands in the ever-evolving semiconductor field. Samsung is looking to leapfrog SK Hynix in high-bandwidth memory with so-called HBM 3E technology, due to roll out this year and next, and even challenge TSMC with "gate all-around," or GAA logic chips. GAA chips at four nanometer thickness could be rolling off Texas assembly lines as early as 2026, Lim says.

Samsung's greatest strength, though, may be that semiconductors are too essential to be a winner-takes-all industry, and too expensive and complicated to admit many competitors. The company can keep churning out profits and growth as a solid No. 2 across various product lines. "The whole world really needs Samsung to succeed right now," says Igor Tishin, a tech analyst at Harding Loevner. "There's too much reliance on TSMC and Hynix."

Jensen Huang, the Nvidia CEO and tech demigod of the moment, seemed to underline this point himself last month, telling Nikkei Asia, "I value our partnership with SK Hynix and Samsung very incredibly."

Samsung shares have climbed 11% since then. The game isn't over for the Korean powerhouse yet.

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April 19, 2024 21:30 ET (01:30 GMT)

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