Samsung’s poor performance becomes a silver lining for Micron??
Samsung Electronics (SEC) announced preliminary operating profit (OP) of KRW 4.3 trillion for the fourth quarter of 2022, which was significantly lower than the market's expectations of KRW 5-6 trillion. This would represent a year-over-year decline of 69% and a quarter-over-quarter decline of 60%. The most likely reason for this poor performance is the falling average selling price (ASP) in SEC's memory division, which includes both NAND and DRAM products. Most analysts expecting heavier losses for NAND.
By right, this negative news from SEC should impact the share price of SK Hynix and Micron as the three of them are the market leaders in the memory sector. However, the share prices of SK Hynix and Micron have actually increased! This is because the market is anticipating that SEC will join the other companies in cutting capital expenditure (CAPEX) and reducing production in order to improve cash flow.
Previously, SEC had resisted cutting production growth through artificial reduction of CAPEX. However, the current poor performance and potential negative free cash flow may lead the company to reduce investment and control production in order to preserve cash. The cash conversion cycle for memory suppliers has been worsening every quarter, with high levels of inventory on their balance sheets. As a result, SEC may be forced to abandon its previous "Chicken Game" strategy, in which it continues to produce and sell products at low prices in an attempt to drive out competitors, in order to break the cycle of excess production and declining prices.
If SEC is indeed willing to participate in production cuts, Micron’s share price should have more upside in the midst of this current memory downcycle. However, please take note that memory bit demand is still deteriorating across all end markets, especially smartphones and PCs. The impending sluggish economic growth and ongoing inventory correction on end-clients, even for hyperscalers and mid-tier server players, is expected to continue for at least 6 more months before there is even a chance of demand recovery.
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