Inventory Shock and AI Setbacks Behind Samsung’s Q2 Earnings Miss

[Korea Financial Times, Gwak Horyung] Samsung Electronics announced preliminary earnings on July 8 that fell short of market expectations, stating that a “one-time expense such as a valuation allowance on inventory in the memory business” had occurred.

A valuation allowance on inventory refers to a process by which a company recognizes a potential loss in advance in its financial statements, when there is a risk that the value of inventory—products held or in production for future sale—may decline.

As semiconductor sales stagnated, inventory accumulated. Samsung Electronics projected that the value of these unsold chips would decline over time and preemptively recorded them as an operating loss.
Although the company is expected to disclose the exact size of the allowance during its earnings call, analysts believe the provision was far higher than anticipated. This is evident from the significant KRW 1.6 trillion gap between the market’s consensus estimate for operating profit (KRW 6.18 trillion) and the actual result (KRW 4.6 trillion).


On a consolidated basis, second-quarter revenue came in at KRW 74 trillion, roughly flat year-on-year. However, operating profit fell back below the KRW 5 trillion mark for the first time in six quarters, since the industry bottomed out in Q4 2023 when Samsung recorded KRW 2.8247 trillion in profit.

Previously, Samsung Electronics had estimated a valuation allowance of KRW 5 trillion for 2024, significantly lower than the KRW 7.4 trillion it recorded in 2023. At the time, the memory market appeared to be recovering, led by demand for AI servers, and the company expected to begin supplying HBM to NVIDIA.

However, as of July, NVIDIA's quality testing of Samsung’s HBM products has shown no progress. In addition, U.S. government sanctions on semiconductor exports to China have also impacted Samsung. With weak sales in the U.S. and restricted access to the Chinese market, the company stated that “export restrictions on advanced AI chips to China led to sales limitations and related valuation allowances.”

Still, there is room for optimism in the second half of the year, as Samsung Electronics has already accounted for much of the loss in H1. The company noted, “Improved HBM products are currently being evaluated and shipped to each customer,” and added, “We also expect the non-memory segment to return to profitability gradually with recovering demand.”

Gwak Horyung (horr@fntimes.com)