CEO Park Jun-young, “Samsung Electronics' stock drop is a supply-demand issue, semiconductor industry not declining”

Silicon Valley's big tech companies are very cautious when discussing actual artificial intelligence (AI) services. In contrast, Tesla's Elon Musk emphasized the importance of memory semiconductors, predicting that memory demand will be 10 times short of current levels by 2031. As such, contrasting views on the pace of AI technology development and memory demand are coexisting in the market.

Samsung Electronics' stock price has fallen considerably from its peak. A key reason for this was the extreme increase in market volatility, with the V-KOSPI index reaching 90 during July. In this situation, foreign investors, especially hedge funds, found it easier to employ short-selling or option strategies in the Korean market, exacerbating the stock price decline. CEO Park Jun-young explained that this stock price movement is not due to a change in the semiconductor industry's conditions.

The Korean stock market is relatively small, making it vulnerable to the movements of foreign investors. Pension funds and institutional investors typically have fixed basket ratios for domestic stocks, and the concentration in specific stocks like Samsung Electronics and SK Hynix sometimes led them to perceive these as levels at which they should sell. Furthermore, the impact of leveraged ETFs intensified market volatility, creating an environment where foreign investors could easily profit through short selling in the Korean market. These market characteristics cumulatively contributed to the decline in Samsung Electronics' stock price.

While current supply-demand issues are short-term, in the mid to long term, proactive government intervention in the capital market and efforts to protect domestic sovereign wealth funds are crucial. Particularly, unless orders from big tech companies continue or memory shortages become clearly apparent, a stock price rebound due to supply and demand may not be easy. Therefore, the market must acknowledge changes in the semiconductor industry, especially the memory industry, and respond accordingly.

If the market does not acknowledge changes in the semiconductor industry, especially the memory industry, supply and demand adjustments could be challenging. Individual investors are looking for investment opportunities outside of semiconductors, while many institutional and foreign investors believe current semiconductor stock prices are undervalued. These differing perceptions among investor groups are contributing to market uncertainty.

The conclusion regarding current stock price trends is that supply-demand issues have been very severe. Especially throughout July, investor sentiment also deteriorated, affecting their morale. Therefore, it was suggested that a more wait-and-see approach is needed at this point. Rather than expecting a sudden rebound, it is necessary to carefully observe market movements.

Samsung Electronics' impressive performance is clear, but questions remain about how long this performance will be sustained and whether the memory industry can truly escape its traditional cycles. The core of this issue lies in the performance of HBM (High Bandwidth Memory) and its success in the market. How well Samsung Electronics performs in the HBM sector will be a crucial indicator to put an end to the memory cycle debate.

Samsung Electronics is in a favorable position to receive high prices not only for long-term supply agreements (LTAs) but also for spot prices. Especially if LTA contracts account for over 30% of total sales and HBM also proceeds by order, Samsung Electronics would receive nearly 60-70% of its total sales through orders. This questions the conventional wisdom that the existing memory semiconductor market moves in 'cycles,' suggesting that Samsung Electronics is trying to dispel the cycle debate through its industry performance and examples.

Samsung Electronics' positive changes will not happen overnight. TSMC, a world-leading semiconductor foundry, also took about 10 years, from 2019, for a firmly established upward trend; it was not so before then. Samsung Electronics will also change in a way that the market can understand, and these changes are expected to be linked to shareholder return policies. Although not yet officially announced, the industry anticipates that Samsung Electronics will announce positive shareholder return policies. Based on its retained earnings and high profits, Samsung Electronics is likely to implement better shareholder return policies than SK Hynix.

It has been concluded that big tech companies have sufficient capacity to invest in artificial intelligence (AI), and AI technology already has substance. Microsoft holds a stake in OpenAI and has not invested heavily in semiconductors directly, so it has abundant surplus funds, and its revenue from cloud, B2B Copilot, and Azure-based Copilot has significantly increased. Google recorded over 80% revenue growth in its cloud division, and Meta and Amazon also saw increased revenues. Most big tech companies are expected to continue investments totaling approximately $200 billion (about 300 trillion Korean Won).

Big tech companies' free cash flow (FCF) may be close to negative this year due to massive investments. However, this is interpreted as a temporary phenomenon. This year, they focused on investments to significantly increase revenue, and from next year, AI-related costs, especially in the B2B sector, are expected to rise sharply. Since AI-related services are contracted on an annual basis, these companies' profitability is also expected to improve significantly from next year. Although revenue is already increasing, profitability is also projected to grow from next year, confirming that the AI sector and big tech companies investing in AI have sufficient growth potential.

The robust performance of big tech companies is expected to largely alleviate concerns about demand in the semiconductor market. In particular, doubts about whether semiconductor demand will continue indefinitely can be considered somewhat resolved. While this positive industry trend may not be immediately reflected in stock prices, it suggests that the outlook for the semiconductor industry itself remains bright.

The 'AI bubble' theory raised by some seems to originate mainly from financial companies like hedge funds, Morgan Stanley, or JP Morgan. However, according to actual semiconductor and AI industry contacts, particularly acquaintances in Silicon Valley's big tech companies, the leading big tech companies in AI services do not think so at all. This indicates a difference in perspective on the AI bubble theory between Wall Street's financial view and Silicon Valley's technology and industry view.

Elon Musk, judging that memory semiconductors are in the most severe shortage, even suggested the possibility of directly engaging in memory production. This clearly illustrates the increasing strategic importance of memory semiconductors in the AI era. He is recognizing that memory supply can act as a critical bottleneck for AI technology development and is exploring direct solutions.

In the stock market, predictions about the memory cycle continue to be wrong. Indeed, one company that argued for a memory peak-out reversed its stance a few days later, stating there were no issues. This phenomenon is causing debate among foreign funds in the financial market, and CEO Park Jun-young emphasized that market judgment errors are recurring, regardless of the AI bubble theory.

In the era of infrastructure AI and device-agnostic AI, memory semiconductors have become an essential element, not an optional one, for performance. Leading companies like NVIDIA could make much better semiconductors if memory performance were sufficient, but that is not currently the case. Indeed, two days before the video was shot, on August 5th, news even reported that NVIDIA requested cooperation from Samsung, highlighting Samsung Electronics' importance in the memory sector.

Samsung Electronics supplies memory not only to NVIDIA but also to various other clients developing their own AI semiconductors, such as Google (TPU) and AMD (Helios). This suggests that even as NVIDIA's fabless monopoly structure weakens, Samsung Electronics will likely maintain its monopolistic position in the memory sector. Therefore, the outlook for Samsung Electronics' industry performance is expected to remain positive.

The most important factor is how quickly foreign capital will flow into the domestic market. Foreign investors, even fundamental investors who analyze industry conditions, require objective evidence. Therefore, in a volatile market, they pay close attention to indicators such as the Put/Call Ratio (PCR) and the foreign net buying ratio. Monitoring the trend of foreign capital inflow using these indicators will help in making wise investment decisions.

Currently, Samsung Electronics' Price-to-Earnings Ratio (PER) is very low at around 4. This is remarkably lower compared to TSMC's PER of over 20 and Micron's fluctuating around 10. These indicators strongly suggest that Samsung Electronics is currently undervalued in the market. A stock price undervalued relative to industry conditions can be an attractive factor from a long-term investment perspective.

CEO Park Jun-young emphasized that the semiconductor industry itself has not declined, while advising that a more balanced perspective is needed regarding stock investment profits. While he currently recommends Samsung Electronics more relative to the industry's conditions, he believes a cautious approach is necessary rather than investing solely for immediate profits. He added that it is important to check supply-demand and various indicators before making investment decisions, and to consider the timing of buying at a low point more carefully.