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

Samsung Electronics is expected to report ​a nearly nine-fold jump in third-quarter operating profit, driven by robust AI ‌demand, ​though analysts have cut forecasts by nearly 8% since the end of August.

Despite moderating gains in the prices of memory chips and a strengthening South Korean won, the world's largest memory-chip maker is expected to post operating profit of 106.1 trillion won ($79.1 billion) for the July-September quarter. The LSEG SmartEstimate, based on forecasts ‌from 21 analysts, and weighted toward those with stronger track records has been slashed by 7.7% since the end of August.

It will be up from 12.17 trillion won a year earlier for Samsung's fourth consecutive quarter of record operating profit, underscoring a prolonged memory shortage as demand for AI infrastructure outstrips supply growth. Chipmakers expect the shortage, which began more than a year ago, to persist into next year and perhaps through 2028.

However, the pace of price ‌increases slowed in the third quarter, fanning concerns that chip margins may have peaked and prompting questions about the durability of the AI spending boom. Samsung will provide preliminary Q3 results on Thursday before detailed data is ‌released in late October.

The moderation in memory prices is being closely watched by investors after a more than one-year-long rally fuelled by AI-driven demand. That rally propelled the world's largest memory producers Samsung, SK Hynix and Micron, to record profits and margins.

RISING COST BURDEN Higher chip prices have pushed up the cost of smartphones and consumer electronics, weighing on demand.

At the same time, long-term supply deals between chipmakers and customers have limited price gains in exchange for guaranteed supply. TrendForce expects conventional DRAM contract prices to rise 10% to 15% in the fourth ⁠quarter from the ​preceding quarter, slowing from a second-quarter surge of roughly 60%.

"Although ⁠the market remains in a tight supply position, the pace of price growth is expected to decelerate," said Avril Wu, its senior vice president for research. Suppliers are wary of further steep price increases that could hurt demand across a broad range of consumer ⁠electronics, Wu added.

"In addition, long-term agreements represent an increasingly higher proportion of suppliers' total output. With ceiling-price mechanisms built in, the rate of price increases has slowed down," Wu said. In July Samsung said it aimed to secure long-term contracts covering about two-thirds of ​its memory output, joining rivals seeking to reduce exposure to the industry's boom-and-bust cycles.

US rival Micron said the chip market could be tighter in 2027 and 2028 than this year, although it expects ⁠its gross margin to slip to 86.3% in the current quarter, from 87%, partly due to employee compensation costs. Samsung's memory-chip operating profit margin is expected to reach 76% in the third quarter, flat with the preceding quarter, estimates by SK Securities analyst Han Dong-hee show.

It also faces ⁠growing ​competition from Chinese rivals, which remain concentrated in lower-end products but are benefiting from the AI-driven memory shortage. "Our industry checks indicate that an increasing number of OEMs and ODMs are adopting Chinese DRAM and NAND," Kinngai Chan, senior research analyst at Summit Insights Group, said in a report.

Currency swings are another headwind. The won strengthened 14.3% against the dollar in the third quarter, rebounding sharply from 17-year lows for its biggest quarterly gain since ⁠early 1998. That reduces the value of overseas earnings when repatriated.

Samsung shares have fallen about 25% from a June record but remain more than double their level at the start of the year. The company is ⁠expected to boost sales of high-bandwidth memory (HBM) chips, a critical ⁠component for AI data centres, as it narrows the gap with market leader SK Hynix.

Samsung had lagged in HBM supplies after delays in qualifying products for Nvidia, but has gained ground this year by expanding shipments of its latest HBM4 chips. Its HBM market share is expected to rise to 34% this year from 20% ‌last year, J.P. Morgan estimates, while ‌SK Hynix's share is forecast to fall to 46% from 60%.

($1=1,341.7500 won)