Samsung’s Tesla order fuels recovery bets despite chip woes

(Bloomberg/Sangmi Cha) — Samsung Electronics Co.’s surprise $16.5 billion chipmaking deal with Tesla Inc. has breathed new life into a foundry business all but written off by many investors.

Its stock has risen about 10% since news about the agreement on Monday, bringing Samsung’s gains in July to over 20% and putting the stock on track for its best month in over two decades. Samsung accounted for more than half of July’s gains in Korea’s stock benchmark Kospi, underscoring growing investor enthusiasm.

The Tesla deal is significant as it marks a shift for the ailing foundry business — from relying on captive internal orders to deeper external engagements, Citigroup analysts said in a report. A successful implementation would boost Samsung’s prospects for generating more external clients and validate its investment in a US plant.

“I think market basically paid not even zero value — negative value — on foundry business so far, and suddenly market checked and said ‘Okay! they still can do’,” said Young Jae Lee, senior investment manager at Pictet Asset Management Ltd., who has Samsung as the biggest position in his $831 million fund.

Once considered a serious challenger to Taiwan Semiconductor Manufacturing Co., Samsung has steadily ceded ground in the global chip race. The company, which supplies its own memory chips and produces semiconductors for clients, has struggled to fill its foundry capacity as major customers such as Apple Inc. exited and its high-bandwidth memory (HBM) business has gone woefully off track.

The order announcement comes more than a year after Samsung replaced the head of its semiconductor business with seasoned memory expert Jun Young-hyun in a bid to restore the company’s technological edge. Under Jun’s leadership, Samsung replaced the head of the foundry business with Han Jin-man, a highly regarded executive at its chip division in the US and recruited Margaret Han, a former Intel Corp. and TSMC executive, to lead Samsung’s US foundry business.

The deal also secures long-term utilization of its facility in Taylor, Texas, which has suffered from construction delays. Samsung is expanding production there with support from the 2022 Chips and Science Act, Washington’s effort to rebuild the American semiconductor industry with billions in subsidies and tax incentives for the likes of Intel. Morgan Stanley analysts Shawn Kim and Michelle Kim estimate the partnership with Tesla could add more than $50 billion to Samsung’s market value.

“Tesla’s AI6 chip announcement validates Samsung’s advanced nodes at its US fab, an endorsement that stands out amid Intel’s well publicized struggles with domestic manufacturing,” said Gary Tan, portfolio manager at Allspring Global Investments in Singapore.

There’s still caution about calling the Tesla tie-up the start of a meaningful turnaround, but it gives ground for greater optimism around South Korea’s largest company.

“Samsung now has the narrative tailwinds and the cash flow support to justify more constructive positioning, but it still needs to prove execution in AI chips beyond just this Tesla headline,” said Haris Khurshid, chief investment officer at Karobaar Capital, a Chicago-based firm. “I’d expect some consolidation until earnings prove that this is more than just a headline trade.”

Some analysts say the company’s other problems are likely to remain. For the first time in April, homegrown rival SK Hynix Inc. overtook Samsung as the world’s biggest producer of DRAM chips. Samsung has also struggled to secure approval from Nvidia Corp. for its latest HBM offerings.

But Tan said Nvidia’s latest line of AI chips “presents Samsung with an opportunity to regain momentum in advanced memory.”

Despite the slow pace of development, JPMorgan Chase & Co. in a July 8 note said it has noticed growing interest from investors on “Samsung’s comeback in the high-bandwidth memory market.”

The company is expected to give more details on the Tesla deal and the outlook for the second half of the year on Thursday when it reports its full second-quarter earnings. It said earlier this month its preliminary operating profit fell by a sharper-than-expected 56% on inventory writedowns that followed the US curbs on Chinese-bound AI chips.

Investors will also be keen to get details on whether Samsung would be able to benefit from Nvidia’s resumption of sales of its H20 AI chips to China. The Korean memory maker has provided HBM3 to pair with H20 chips in the past.

“Nvidia has announced that they are allowed to restart sales of the H20 to China and they have announced a China version of their RTX chips, both of which Samsung is the major supplier of,” said Charlie Linton, a London-based portfolio manager at Ninety One, who added Samsung earlier on what he deemed an attractive valuation. “None of this potential was priced in.”

The stock is in a better position than last year, when company management issued a rare public apology for disappointing results. But despite the fanfare, analysts warn the rally may be overextended in the short term. Technical indicators show Samsung shares are trading at overheated levels, and consensus targets imply the smallest 12-month upside in more than four years.

–With assistance from Yoolim Lee and Vlad Savov.

(Updates with Samsung’s Wednesday share rise in second paragraph)

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