Samsung Electronics andTeslastruck a surprise deal worth $16.5 billion for chip manufacturing, breathing new life into its foundry business. Previously, many investors had almost given up hope on the business. Samsung shares have risen about 10% since news of the deal broke on Monday, taking its July gain to more than 20% and on track for its best month in more than two decades. Samsung accounted for more than half of July's gains in South Korea's stock market benchmark Kospi, underscoring growing investor enthusiasm.
Citi analysts said in a note that the Tesla deal is significant because it marks a shift in the ailing foundry business from reliance on internal orders to deeper external collaboration. If successfully implemented, it would boost Samsung's prospects of attracting more external customers and justify investments in U.S. factories.
"I think so far, the market has basically given no value, or even negative value, to Samsung's foundry business, and now the market suddenly realizes, 'Okay! They are still capable,'" said Young Jae Lee, senior investment manager at Pictet Asset Management Co., Ltd. Samsung is the largest holding in the $831 million fund he manages.
Samsung was once seen as a strong competitor to TSMC, but it has gradually lost ground in the global chip race. This company, which not only supplies memory chips for itself but also produces semiconductors for customers, has difficulty filling up its foundry capacity due to the withdrawal of major customers such as Apple, and its high-bandwidth memory (HBM) business has also seriously derailed.
More than a year ago, Samsung appointed veteran storage expert Jun Young-hyun to replace the head of its semiconductor business in an effort to revive the company's technological edge. Under Jeon's leadership, Samsung appointed Han Jin-man as head of its foundry business (Han Jin-man was previously a highly acclaimed executive at Samsung's U.S. chip division) and recruited former Intel and TSMC executive Margaret Han to head Samsung's U.S. foundry business. The announcement of Tesla’s order comes just after this series of personnel adjustments.
The deal also secures long-term capacity utilization at Samsung's Tyler, Texas, plant, which has been plagued by construction delays. Samsung is expanding production at the factory with support from the 2022 Chip and Science Act. The U.S. government passed the bill and provided billions of dollars in subsidies and tax incentives (such as to companies such as Intel) in an effort to rebuild the U.S. semiconductor industry. Morgan Stanley analysts Shawn Kim and Michelle Kim estimated that the partnership with Tesla could add more than $50 billion to Samsung's market value.
"The announcement of Tesla's AI6 chip verifies the advanced process nodes of Samsung's U.S. factories. This recognition is particularly prominent in the context of Intel's frequent domestic manufacturing problems," said Gary Tan, portfolio manager of AllianceBernstein Global Investors in Singapore.
While some caution that the partnership with Tesla may not be the beginning of a meaningful turnaround for Samsung, it brings more optimism to South Korea's largest company.
"Samsung now has the narrative tailwinds and cash flow support to support a more aggressive positioning, but it still needs to prove execution in AI chips and not just rely on this headline deal with Tesla," said Haris Khurshid, chief investment officer at Karobaar Capital in Chicago. "I expect there may be some consolidation in the stock until the results prove that this is more than a headline deal."
Some analysts said other problems at Samsung may remain. In April this year, local rival SK Hynix surpassed Samsung for the first time to become the world's largest DRAM chip maker. In addition, Samsung’s latest HBM products have difficulty gaining approval from Nvidia.
But Gary Chen said that Nvidia’s latest AI chip series “provides an opportunity for Samsung to regain momentum in the high-end storage field.”
Despite the slow pace of development, JPMorgan said in a July 8 report that it has noticed growing investor interest in "Samsung's return to the high-bandwidth memory market."
Samsung is expected to provide more details on the Tesla deal and prospects for the second half of the year when it reports its full second-quarter earnings on Thursday.
Samsung stock is in a better position now than it was last year. Last year, company management issued a rare public apology for poor performance. But despite the buzz surrounding the surge, analysts have warned that the gains may be overdone in the short term. Technical indicators suggest Samsung shares are trading at overheated levels, while consensus 12-month upside expectations are the smallest in more than four years.