When the market "prices in perfection," even Samsung's excellent performance is not good enough.

Original author: Dong Jing

Original source: Wall Street See

Samsung Electronics delivered a historic report with a 19-fold surge in profits, but was met with a sharp single-day stock price drop. This is not because the performance was insufficient, but because the market had already priced in "perfection" in advance — the release of the earnings report was merely a signal for funds to exit.

On July 7, a Wall Street See article stated that Samsung Electronics' second-quarter operating profit surged approximately 19 times year-on-year to 89.4 trillion Korean won (about $58.4 billion), not only setting a quarterly historical record but also surpassing Nvidia's last quarter operating profit of $894k, making it the global company with the highest quarterly operating profit. Revenue doubled to 171 trillion Korean won, both exceeding analysts' average expectations. However, after the earnings report was released, Samsung's stock price fell by as much as 8% in a single day, South Korea's KOSPI index dropped 6%, and SK Hynix fell over 7%.

Wall Street See also mentioned in an article that "buy the rumor, sell the news" logic clearly played out again. On the night before the earnings report was released, the Philadelphia Semiconductor Index rose 2.2% in a single day, the S&P 500 rose 0.7%, and the Nasdaq 100 rose 1.3%. As the positive news was realized, funds quickly exited.

Causeway Capital Management portfolio manager Brian Cho stated bluntly, what the market really wants to see is whether the improvement in free cash flow can form a sustainable step change, and how management treats shareholder returns — the pricing logic has shifted from "how fast is profit growth" to "can these profits be turned into real cash distributed to shareholders."

In addition, the sharp reversal in market sentiment has its macro backdrop. Last week, Meta first hinted at scaling back capital expenditures, triggering the largest two-day selloff in high-beta momentum stocks since the COVID-19 pandemic. Samsung's decline also put pressure on similar chip stocks SK Hynix and Micron, and the high-valuation logic of the entire memory chip sector is facing a systemic reassessment.

Impressive results, but not good enough

The Wall Street See article stated that Samsung's second-quarter operating profit is expected to reach 89.4 trillion Korean won, up 56% quarter-over-quarter, while analysts' average forecast was 84.2 trillion Korean won; revenue for the same period was 171 trillion Korean won, exceeding market estimates of 169.2 trillion Korean won, an increase of about 129% over the same period last year. The company plans to release the full earnings report on July 30, which will disclose net profit and segment data for each business division.

The core driver of this growth lies in the continued tight supply of memory chips. The strong demand from AI data centers for high-bandwidth memory (HBM) has prompted manufacturers to shift capacity toward high-end products, thereby causing a shortage of traditional DRAM and NAND memory chips and pushing prices up across the board.

According to HSBC data, the average selling price of DRAM rose more than 40% quarter-over-quarter in the second quarter, while NAND prices rose more than 50%. Citigroup Research data is similar, showing that the average prices of DRAM and NAND rose 44% and 53% quarter-over-quarter respectively during the same period.

However, although the revenue of 171 trillion Korean won was higher than the average analyst estimate, it fell short of the optimistic forecast of 173.9 trillion Korean won from some institutions. Against the backdrop of already high valuations, this slight shortfall was enough to trigger profit-taking.

The brilliance of the memory business masks several cracks in the company's overall structure. Analysts expect that losses in Samsung's foundry and logic chip (LSI) businesses may have widened this quarter, partly due to bonus expenses being proportionally allocated to the overall cost of the semiconductor division.

In May this year, Samsung reached a compensation agreement with employees in its chip division, linking performance bonuses to operating profit, and stipulating that, subject to meeting specific profitability targets, 10.5% of the semiconductor division's annual operating profit would be set aside for special bonuses. Some analysts noted that without this provision, Samsung's operating profit would have exceeded market expectations even more.

AI demand supports memory boom, but marginal signals weaken

The core logic driving this super cycle of memory chips remains valid: the massive expansion of global AI data centers has generated strong demand for high-end memory chips, and memory shortages have become a key bottleneck for AI development.

Multiple industry executives, including Nvidia CEO Jensen Huang and OpenAI COO Brad Lightcap, have warned about this. Major manufacturers are prioritizing supply of high-end memory products, causing a simultaneous shortage of traditional memory products. Analysts expect the supply shortage to last at least until 2027.

Market research firm Counterpoint expects that the average operating profit margin of the three major memory manufacturers—Samsung, SK Hynix, and Micron—will remain in the range of 75% to 80% in the second quarter of this year. The agency noted in its report that some views consider such high profit margins as "excessive profiteering" and warned that "if this situation continues, memory manufacturers may face regulatory pressure."

In addition, the Wall Street See article mentioned that what deserves more attention than the earnings report itself are the signals released from the upstream of the industry chain. Meta recently hinted at setting a cap on AI capital expenditures, which the market interpreted as an early warning that technology giants' AI infrastructure investment might be peaking, directly triggering one of the most severe two-day selloffs in high-beta momentum stocks since the COVID-19 pandemic.

Jean Boivin's team at BlackRock Investment Institute put the issue more directly: the core of the AI bubble debate is not current valuations, but whether future profits can maintain extraordinary levels. If AI cannot translate current scarcity into real productivity improvements, the current extremely high profit expectations will face revisions.

Samsung lags behind SK Hynix, South Korea bets on AI chip dominance

From a national strategic perspective, the South Korean government sees Samsung and SK Hynix as core pillars in the fight for global AI leadership. Samsung Group and SK Group each plan to build two chip factories in southwest South Korea, with a total investment of 800 trillion Korean won to rapidly expand capacity. South Korea aims to double its memory chip production capacity within five years, and Samsung has announced it will invest over $70 billion in capacity expansion and R&D by 2026.

In terms of stock performance, Samsung has accumulated a gain of about 165% so far this year, but significantly underperforms its competitor SK Hynix's gain of about 260%. The gap is mainly due to differences in product mix—SK Hynix's business is highly concentrated on high-end memory chips for AI computing demands, while Samsung's product portfolio is more diversified, spanning chips and consumer electronics. This divergence sends a clear signal: on the current track, focus is more favored by capital than scale.

Samsung's full earnings report will be released at the end of this month, and the breakdown data for each business segment will tell the market how much real value this round of AI capital spending has generated. That number will become an important reference point for the logic of AI hardware investment in the next phase.