By Robyn Mak
Memory chips may be in the midst of an historic if uncertain AI boom, but the risk of a painful downturn still looms. That may be why industry giants Samsung Electronics KRX:005930 and SK Hynix KRX:000660 are turning to multi-year contracts to help protect earnings. It's prudent, given the South Korean duo's combined $2.1 trillion long-term spending plans and broader warnings of faltering AI demand. Terms will matter, but such measures might only soften what may be a spectacular bust.
To appreciate just how severe the current shortage is in data storage chips, look no further than Samsung's second-quarter earnings. The $1.3 trillion titan on Tuesday told investors that operating profit for the most recent quarter would probably hit nearly $60 billion, an astonishing 19-fold surge from the same period last year. That puts the company on track to deliver a more than 750% surge in full-year operating profit to $243 billion, according to analyst forecasts on Visible Alpha. Cross-town rival SK Hynix looks likely to more than quintuple operating profit this year.
The shortage will probably last until at least the end of next year, when new capacity from Samsung and SK is expected to come online. By 2028, Samsung's average selling prices for dynamic random access memory, used in everything from data centre servers to PCs to smartphones, will more than halve, Bernstein analysts estimated last month.
Unlike in previous market downturns, though, manufacturers are increasingly locking in customers with multi-year contracts. Details are not usually disclosed, but Micron NASDAQ:MU executives recently revealed that many of these agreements are designed as "take-or-pay agreements". These obligate customers to pay their annual volume commitments at a price within an agreed band whether they want the memory chips or not. Some agreements also include up-front cash deposits and other financial guarantees.
It's better than nothing. But these contracts seem unlikely to offer anywhere near full protection for chipmakers. Morningstar analyst Jing Jie Yu reckons most of these multi-year agreements only account for a fifth of total contract value and only span three years. That means they will expire by 2028 when prices are expected to fall and the bulk of output is still exposed to market swings.
Moreover, Samsung and SK both recently announced massive long-term chip investment plans totalling $2.1 trillion. The pledges come as concerns over weakening investment appetite from U.S. tech giants rise. Just last month, the Bank for International Settlements warned that disappointing AI returns could "turn the capex boom into a protracted investment bust". Multi-year contracts leave memory chip giants only slightly less exposed.
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Samsung Electronics on July 7 forecast operating profit for the second quarter to be 89.4 trillion won ($58.47 billion), up from 4.68 trillion won a year ago. Revenue would probably rise 129% to 171 trillion won from a year earlier, it said.
The company separately announced on June 29 it would invest 2,100 trillion won ($1.38 trillion) in its semiconductor business through 2040 but said spending would be adjusted to market conditions and business needs. Rival SK Hynix also announced a 1,100 trillion won "mid-to-long term investment strategy".