Samsung’s New Bright Spot: Memory Chips

While there are concerns that growth of Samsung Electronics Co.’s smartphone business will slow, the South Korean technology giant’s memory-chip business may become its new bright spot.

Samsung is best known for consumer electronics such as its Galaxy smartphones and television sets, but the company is also the world’s biggest supplier of memory chips used to save data in various electronic devices.

“The strong outlook for the memory-chip business more than makes up for concerns about a slowdown in smartphones,” said Sanford C. Bernstein analyst Mark Newman, who has an “outperform” rating for Samsung shares.

A major factor behind the bullish view on Samsung’s memory-chip business is the rise in chip prices, due in part to a fire that broke out last month at a factory that produces dynamic random access memory chips.   DRAM chips are widely used in personal computers, tablets and smartphones, and Samsung is the largest supplier of such chips. SK Hynix Inc., the South Korean chip maker that runs the factory, has said that it expects the plant to return to normal operations by November.

DRAMeXchange, which tracks the chip market, said last week that the rise in DRAM prices will likely persist in the coming months amid tighter supply.

The fire has spurred expectations of a possible shortage of not only DRAM chips but also of another type of memory chip called NAND flash memory. Hynix has said it may use some of its NAND chip production capacity to produce DRAM chips instead to make up for lost output after the fire. NAND chip contract prices rose between 3% and 6% in the second half of September, according to DRAMeXchange.

Solid chip pricing is not just a temporary outcome of the fire, but also a longer-term trend as a result of consolidation in the chip industry, Mr. Newman said. In the DRAM market, for example, U.S. chip maker Micron Technology Inc.’s acquisition of Japanese rival Elpida Memory Inc. last year, as well as the decline of Taiwanese DRAM chip suppliers, has resulted in more restrained supply and better pricing, he said.

Increasingly, investors are wondering whether Samsung’s smartphone business can sustain its profit growth even if the percentage of cheaper handsets — typically sold at lower margins — increases in Samsung’s overall smartphone sales volume.

As of Monday afternoon in Asia, Samsung shares were up 1.3%.