One of the defining debates of recent years has been whether the surge in memory chip prices is a temporary supply-and-demand issue, or a legitimate structural change in the tech industry. Recent earnings reports from leading manufacturers have lent supporting evidence to the latter case.
On Thursday, Samsung Electronics’ semiconductor division reported operating profits of 89.5 trillion won ($61.7 billion) for the three months to June. For context, this is over 250 times its earnings across the same period last year. These numbers were driven by surging memory chip prices in response to a global shortfall, which Samsung executives predicted will worsen in 2027 and persist into 2028.
The disruptions are so pronounced that they are even causing problems within the company’s own operations: Samsung’s phone division posted a loss of 700 billion won ($480 million), the first in its history, as its devices rely on the memory manufactured in the company’s own factories.
Still, these losses were modest compared to the profits from its memory chip business. Overall, the firm posted record revenue of 171.5 trillion won ($121.5 billion) with net profit up 1,300%.
Even in light of these figures, traders and investors remained fairly cautious on the company’s stock. A broad selloff in chip stocks in July saw Samsung drop to 40% below its June high, despite spiking as much as 8.4% on the day of the earnings announcement.
The company ended June with 167 trillion won in net cash and said the board is discussing a special dividend for this year without naming an amount.
HBM is the source of the memory supply shock
In simple terms, the chips manufactured by the likes of Samsung and SK Hynix hold data in memory while a processor works on it. The type found in conventional home computers, phones, and servers is DRAM.
To create the HBM (High Bandwidth Memory) required by AI data centers, manufacturers stack DRAM chips into towers, plugged into AI processors. Each unit of HBM consumes around three times the ‘wafer capacity’ of standard DDR5, and also earns significantly more per unit for the companies that manufacture it.
Shifting production to the more lucrative HBM play is what has driven massive profits for chipmakers, while drastically reducing the supply of memory on the market. Samsung's chip unit posted a 70% operating margin, a level no analyst expects to last.
This has led to a structural shift in the market. Jaejune Kim, Executive VP of Samsung’s memory business, reported that "Almost all customers are requesting multi-year supply contracts," on the company’s Q2 earnings call.
Previously, these chips traded like commodities on monthly contracts; every supply bottleneck resulted in significant price hikes, with prices collapsing when those supply issues were resolved. Profits generally evened out month to month as a result. Samsung’s multi-year contracts will instead smooth these price fluctuations out by increasing the time horizon of the deals, resulting in greater predictability for customers.
Samsung targets five-year prepayment deals with major data centers
Five of the largest data center operators in the world are already signed onto such deals. Samsung announced rolling five-year commitments with these companies, and claims another five major operators are in talks for similar arrangements. The company stated it aims to sell 60% to 70% of its inventory under similar deals in future.
Although the precise terms are private, the deals reportedly include prepayments of up to 25%. Samsung has also included floor prices in its contracts, meaning levels that it can continue to sell to the client at even if the market rate drops lower.
Samsung’s first U.S. fabrication plant is due to start operating this year in Taylor, Texas, and a second could reach mass production in 2030. An average of three and a half years passes before a new plant reaches production capability, so facilities breaking ground today would only become productive by the end of the decade.
Memory chip buyers are facing financial strain
The ambivalence of the markets in the face of Samsung’s success suggests investors may have priced in even higher figures. It was also likely due in part to financial pressures on the companies that buy its products. If these major AI firms do not have the capital to sustain high buying activity, then chipmaker profits will inevitably dip accordingly.
Last week, Google parent company Alphabet logged the first negative free cash flow in its history at minus $5.9 billion. And on Wednesday, a release from Meta stated that its free cash flow has dipped by 91% to $784 million.
Samsung’s long-term deals introduce different financial constraints. If prices fall, the floor prices included in the deals will protect the firm’s income. However, if hardware prices instead keep rising, committing so much inventory in advance will also place a ceiling on the prices it can charge.
However, the greater financial stress will likely be felt outside of the AI industry. DRAM is required to power other kinds of consumer goods, from cars to home appliances. With AI firms buying up the supply, these other industries will be forced to pick over whatever remains. The resulting increases in production costs are already being baked into the final cost to consumers.
Samsung predicts that the earliest chance of any meaningful relief in supply-side shortages is in 2028, meaning this trend is likely to continue for at least another year and a half.