Samsung announces a record profit for the third quarter, but the price of chips falls in the shadow

SEOUL (Reuters) – The operating profit of Samsung Electronics Co Ltd for the third quarter surged by a fifth to reach a record high, as its semiconductor unit is supported by strong demand from the centers of data and output efficiencies.

However, sharp price declines of some types of chips have put an end to a two-year super cycle characterized by tight supply and rising demand, and analysts predict that the July-September quarter will mark a peak in profits from the South Korean technology giant.

Chart: Slowdown in operating profit growth of Samsung Electronics – tmsnrt.rs/2zKzlQI

Competition from cheaper Chinese phones, as well as higher marketing costs, have also made the imminent rebound of Samsung's mobile unit unlikely.

"Falling chip prices will put pressure on profits as smartphone shipments will not be satisfactory and will continue to squeeze margins," said Song Myung-sup, Senior Analyst at HI Investment & Securities.

The results of the world's third largest maker of memory chips and smartphones in the third quarter, however, were impressive. Preliminary operating profit rose 20.4 percent to 17.5 trillion won ($ 15.5 billion) on a 4.8 percent revenue gain, in line with market expectations.

The company has not specified its results and will report detailed results at the end of October.

Chips account for nearly 80% of Samsung's operating profit, and Samsung has taken advantage of the rise of data centers for cloud computing, which has led to soaring prices for DRAM chips. DRAM chips, which help devices perform multiple tasks, are their primary memory product.

It has also made progress in production technology allowing it to manufacture smaller and faster chips per silicon wafer.

But NAND chip prices, used for long-term data storage, have fallen because of plentiful demand. DRAM prices should do the same, albeit at a much slower pace, with some analysts saying demand from Chinese data centers would provide support.

The DRAMeXchange market tracker predicts a 5% average price decrease for DRAM products in the fourth quarter compared to the previous quarter, more than the previous estimate of 3%.

According to Refinitiv data, Samsung should still record a decent growth in its operating profits of 12% in the fourth quarter. But this translates into minimal earnings growth in the first half of 2019, followed by a slight decline in earnings in the second half of the year.

Samsung's shares rose 0.2% on Friday afternoon, while the overall market fell slightly. The stock has lost 12% this year since the beginning of the year due to concerns about chip prices, underperforming the overall market which has fallen by 8%.

Samsung division revenues are not yet known, but analysts expect its mobile business is struggling to generate earnings growth for the next two quarters.

It is working to bring in phones with flexible displays, but they should not become an important profit driver.

"His mobile division will continue to look bad. The next Samsung foldable phones will not be significant in terms of sales, but rather symbolic progress in terms of innovation, "said Park Sung-soon, an analyst at BNK Securities.