Profit warning drops Samsung shares in Tuesday trading, rattles U.S. tech market 

A profit warning issued by Korean electronics manufacturer Samsung is having a ripple effect on the stock market, causing declines in some major technology companies. 

On Tuesday, Samsung announced that its fourth-quarter operating profit is expected to be 35% lower than the previous year, missing expectations by a wide margin. The company projected an operating profit of 2.8 trillion South Korean won ($2.13 billion) for the October-December quarter, down from 4.31 trillion won in the same period the previous year and 2.43 trillion won in the preceding quarter. 

This profit guidance fell well below LSEG’s SmartEstimate of 3.7 trillion won, which places greater weight on the expectations of analysts known for consistent accuracy. Samsung's shares closed 2.4% lower in South Korea. 

Concerns about softer demand extended to U.S. shares, with iPhone maker Apple slipping by close to 0.9% in premarket trading. Meta Platforms, Facebook’s parent company, also saw a 0.4% decline. Amazon (-0.4%) and Google-parent Alphabet (-0.17%)17%), along with futures for the benchmark S&P 500 (-0.4%) and tech-heavy Nasdaq-100 index (-0.6%), were all trading lower. 

Samsung's inability to capitalize on the increased demand for artificial intelligence (AI) chips over the past year runs in sharp contrast with the success of AI chip maker Nvidia, which closed at a record high of $522.53 on Monday and was trading higher in the premarket on Tuesday. 

Samsung earnings preview: Bad semiconductor yields can turn into bad earnings, says analyst 

After Samsung’s announcement on Tuesday, Cory Johnson, chief market strategist at The Futurum Group, told CNBC’s Squawk Box Asia that the Korean firm’s semiconductor yield was “so much worse” than competitors like Taiwan’s TSMC, which could translate into bad earnings: 

″[Samsung is] very good at making some of the best semiconductors in the world, at least in making them and getting them done. But their yields are so much worse than competitors like TSMC”.

He added that this means ″[...] bad yields can turn into really bad earnings results”. 

The company is set to announce detailed earnings on January 31, according to a filing. 

Samsung share price: Stock hit by fall in memory chip prices 

Last year, saw a significant drop in memory chip prices due to excess inventories post-Covid and weakened demand for end products such as smartphones and laptops. 

SK Kim, an analyst at Japanese investment bank Daiwa Capital Markets, wrote in a January 4 report cited by CNBC: 

“We estimate memory prices started to rebound from 4Q23, driven by production cuts by suppliers and a recovery in demand for mobile and PC”. 

The decline has hit Samsung's earnings hard. Samsung’s third-quarter operating profit plunged by a 77.6% compared to the previous year, even though it fared better than expected. The company’s second-quarter operating profit also saw a 95% slump compared to the same period a year ago. 

By late October, both Samsung and SK Hynix, the world's second-largest dynamic random-access memory (DRAM) chip maker, signaled during their third-quarter earnings calls that weak demand might have reached its low point following production cuts. 

Daiwa Capital Markets’ Kim added that the bank expects headwinds for chip makers in the short term as the rebound takes effect: 

“We expect further price hikes in 1H24 and a marked rebound in earnings for memory makers in 2H24 and 2025. As such, we anticipate tailwinds for share prices in the near term.” 

On Tuesday, Samsung shares on the Korea Exchange (KRX) closed 2.35% down at 74,700 won. The Samsung share price has gained close to 24% over the past year, although it’s year-to-date (YTD) performance in 2024 has been less than stellar — as of January 9, the stock was down 4.84% YTD.