Samsung Electronics shares extend gains after Tesla deal, but challenges remain

By Hyunjoo Jin and Zaheer Kachwala

Seoul, July 29 (Reuters) - Shares in Samsung Electronics 005930.KS eked out small gains on Tuesday, following a sharp rally the previous day after the South Korean technology company clinched a $16.5 billion deal to supply artificial intelligence chips to Tesla TSLA.O.

Analysts said the agreement could bolster the company's unprofitable contract manufacturing business, but Samsung faces challenges in securing additional large customers both for logic chips and memory chips where it struggles against TSMC 2330.TW and SK Hynix 000660.KS.

"This new deal breathes some much-needed life into the business and may signal the start of a turning point for Samsung, but its memory business will need to make considerable progress too," Ben Barringer, global technology analyst at Quilter Cheviot, said.

Samsung Electronics, the world's top memory chip maker, has suffered delays in supplying the latest high-bandwidth memory (HBM) chips to key U.S. customer Nvidia NVDA.O, a setback that has dented its profits and weighed on its stock.

In its "foundry" or contract manufacturing business, where it manufactures logic chips designed by customers, Samsung remains a distant second to market leader TSMC.

"Whether this will open the door for additional large customers will depend heavily on its execution," Barringer said.

Shares of Samsung recovered from early losses to close 0.3% higher on Tuesday, lagging the broader market's .KS11 0.7% gain. The shares were down more than 2% earlier in the session after surging nearly 7% on Monday, following the Tesla deal.

Meanwhile, Samsung Electronics Chairman Jay Y. Lee departed for Washington on Tuesday. A Yonhap News Agency report said he was expected to support trade talks between South Korea and the U.S. but a company spokesperson, when contacted by Reuters, described it as "business trip", with no further details.

While South Korea has been promoting partnerships in chips and shipbuilding with the U.S., a trade official said the Tesla deal was unrelated to ongoing trade talks aimed at reducing U.S. tariffs. Analysts, however, said the deal could enhance prospects for Samsung's investments in its Texas-based new chip factory.

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Tesla CEO Elon Musk said late on Sunday that Samsung's new chip factory in Taylor, Texas, would make the auto company's next-generation AI6 chips, likely to be used in self-driving cars, humanoid robots and data centers, without elaborating on the timing of the production.

The deal comes as Samsung has struggled to win major customers for its new Texas factory, partly due to low production yields of its cutting-edge chips.

"There also has to be a chance that the company was able to strike the long-term deal on favourable terms, given that Samsung needed to prove its contract manufacturing capabilities," said Russ Mould, investment director at AJ Bell.

The long-term supply deal for a key technology from a U.S. factory would "lessen the risk of supply-chain dislocations or tariff friction," he said.

"Samsung now needs to prove it can deliver in the right volume to the right quality for what is likely to be a demanding customer."

While the deal is "more about securing the longer-term future, we won't see these in cars for at least a year or two," said Matt Britzman, senior equity analyst at Hargreaves Lansdown.