Asia Tea Time - #80 ☕

Samsung’s Chip Struggles and Why Gold Could Be a Smart Diversifier

Author

Tim Phillips
November 01, 2024 • Estimated Reading Time: 6 minutes

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This week I talk Samsung’s poor chip earnings and why the yellow metal is so alluring for investors. 

Also check out my first AMA (ask me anything) post where I answer some questions I’ve gotten from readers.

Got a question? Submit it here and I’ll try to answer it in a future post.

Macro in Asia

Samsung Electronics chip division’s operating profit falls short of expectations

Samsung Electronics, one of the largest electronic device manufacturers and chip suppliers in the world, saw its semiconductor division’s third-quarter 2024 operating profit fall short of expectations. 

The unit of the electronics giant saw Q3 2024 operating profit of 3.9 trillion Korean Won (US$2.8 billion), which was down 40% from the previous quarter.

Why it’s happening

  • Samsung Electronics released its broader results on Thursday (31 October) and it made for scary reading for investors on Halloween.

  • The chip unit is also involved in producing chips for smartphones and memory chips that go into PCs, markets which are both showing weakness right now.

  • Samsung said the poor earnings was down to inventory adjustments that impacted demand and also the increasing supply of legacy products in China. 

Why it matters

  • The company is struggling to compete with the likes of Taiwan Semiconductor Manufacturing Co, also known as TSMC, in the world of cutting-edge chip production (i.e. it’s falling behind on the tech front).

  • Samsung is even trailing its smaller domestic rival – SK Hynix – in the world of advanced chips, with the latter posting a 7 trillion Korean Won operating profit last week.

  • SK Hynix has been outdoing its bigger rival in delivering quality high bandwidth memory (HBM) chips to the likes of Nvidia.

What’s next?

  • Samsung investors will be looking towards management to see if it can engineer a turnaround in fortunes for the chip unit.

Tim’s Take 

Right now in technology, the two letters “AI” are all the craze. Naturally, semiconductor firms are perceived the biggest beneficiaries of this. 

But a lot of traditional chip companies, like Samsung, don’t seem to have got the memo. Samsung’s share price so far in 2024 is actually down 27% while that of its Korean rival, SK Hynix, is almost the mirror image of that – up 28% so far this year.

One of the main reasons has been that Samsung has fallen short in the high standards in delivering advanced chips, such as HBM chips. These are the ones that data centres run on and which are critical in order for AI infrastructure and hardware to function.

Samsung also issued a public apology in October – not exactly a good look – after acknowledging that the company has fallen behind in the AI race and is currently in “crisis”.

It’s a dark moment for one of Asia’s biggest tech firms and highlights just how quickly the AI revolution is happening. The company is traditionally one of the biggest tech firms in Asia but competition from both local and regional rivals have left it on the back foot. 

Investors will be wanting to see further (positive) announcements with regards to its chip business in the coming quarters and an ability to go toe to toe with SK Hynix when fighting for key clients.

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Tim’s Money Tip of the Week

A lot of the headlines in financial news recently have been about gold hitting a new record high. Does that mean we should rush out and buy gold like there’s no tomorrow? Not necessarily.

There’s more nuance to it than that. Why has gold been setting record highs in recent months? Well it’s mainly been down to a few factors. First off, the US Federal Reserve is set to continue cutting interest rates and that’s seen as a driver to weaken the US dollar (and therefore, increase the appeal of gold).

Second, there’s been a lot of crap happening around the world – from conflicts in the Middle East to tensions around the US presidential election and geopolitical strife between the US and China. All this uncertainty means the demand for gold goes up.

But should be going “all in” on gold? Certainly not. That’s because, over the long term, gold doesn’t match the returns of stocks or even bond for that matter. What it does do, though, is provide a level of diversification from those two asset classes.

So, because it has a low correlation to other asset classes, gold can provide a useful function in a portfolio. However, the conventional wisdom is to not hold more than 5-10% of your overall net worth in gold.

And the best way to buy it? It’s simple, through a gold exchange-traded fund (ETF). There are ample options but the SPDR Gold Shares ETF (NYSE: GLD) is the biggest of them. Luckily for Singapore investors, there’s also a Singapore Exchange (SGX) listing of the ETF that offers both USD and SGD share classes.