Samsung makes the memory chips inside rival phones, then sells those same rivals its own Galaxy devices.
What stands out
- Earnings significantly exceed cash generation
At a glance
Samsung makes the memory chips inside rival phones, then sells those same rivals its own Galaxy devices.
Samsung fabricates DRAM and NAND chips at its Pyeongtaek fabs using EUV lithography at 3nm and 5nm nodes, then sells those chips both to its own Galaxy device assembly line and to Apple, Qualcomm, and other smartphone makers that compete directly with Galaxy. Once Apple or Dell validates a Samsung chip against a specific process node — a certification that takes 18 months — switching to a different supplier would push back their product launches by the same stretch, which is what keeps those competitors returning to Samsung as an input supplier even as they race against it in the device market. Every wafer from both sides of that relationship must pass through an ASML EUV machine, and ASML produces only around 50 of those machines per year worldwide, so Samsung cannot grow its chip supply to external customers without taking capacity away from Galaxy production, and vice versa. If export controls were ever tightened enough to limit how many EUV tools Samsung can secure, the qualification lock that makes Samsung indispensable to its own rivals would start to dissolve, because customers would finally have reason to absorb the 18-month penalty and find another supplier.
How does this company make money?
Samsung earns money each time it sells a memory chip to an electronics manufacturer; those chips are priced on the spot market, so revenue rises and falls with global demand. It also earns money on each Galaxy smartphone or other consumer device sold through carrier partnerships and retail stores. On top of that, companies that use Samsung's display and semiconductor technologies under license pay Samsung ongoing patent fees.
What makes this company hard to replace?
Enterprise customers using Galaxy devices must spend 6 to 12 months recertifying the Samsung Knox security platform with their own IT departments before they can switch to another device. Memory chip customers — in servers, PCs, and cars — face an 18-month qualification process to validate any new supplier, which would push back product launches. Customers using Samsung OLED displays also require custom driver software built specifically for their product, so switching display suppliers means rebuilding that integration from scratch.
What limits this company?
Every advanced chip Samsung makes must pass through an EUV machine made by a company called ASML. ASML builds roughly 50 of those machines per year worldwide, and each one costs $200 million. Samsung cannot make more chips for Galaxy devices or for Apple or Qualcomm without getting more of those machines — and the global supply of them is fixed.
What does this company depend on?
Samsung cannot run without ASML EUV lithography systems to print its most advanced chips. It relies on ARM for the architecture licenses that power its Exynos processors. Google's Android operating system runs on every Galaxy device. Rare earth materials — including gallium and indium — go into the chips themselves. And for certain specialized chips, Samsung uses Taiwan Semiconductor Manufacturing Company as a foundry.
Who depends on this company?
Apple's iPhone launch schedules depend on Samsung memory; a supply shortfall would delay devices hitting shelves. Samsung supplies 43 percent of the world's DRAM, so if it stopped, server and PC makers like Dell and HP would face immediate component shortages. The Android smartphone market would also lose its main high-end competitor to iPhone, reducing the competitive pressure that pushes both platforms to improve.
How does this company scale?
Adding more cleanroom production lines lets Samsung replicate the same chip-making process relatively cheaply, so output can grow without reinventing anything. What does not scale easily is developing the next generation of chips — each new lithography node requires three to four years of physics and materials research that cannot be sped up by hiring more people or spending more money.
What external forces can significantly affect this company?
US export controls already restrict sales of advanced chip-making equipment to certain Chinese factories, which limits how much Samsung can expand into that market. China is also actively building its own memory chip industry, which could shrink long-term demand for Samsung's chips. The Korean won's exchange rate against the US dollar matters directly to Samsung's margins, because memory chips are priced globally in dollars while many of Samsung's costs are paid in won.
Where is this company structurally vulnerable?
If US export controls were extended to block ASML from delivering EUV machines to Samsung's Pyeongtaek fabs, Samsung could not keep up with advanced chip production. At the same time, if the Korean won dropped sharply against the US dollar, the profit margin on memory chips sold at global spot prices could collapse. Either event would give Apple, Qualcomm, and other customers a strong reason to absorb the 18-month requalification cost and find a different supplier — which would dissolve the certification lock that makes Samsung indispensable to the same companies it competes against.
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