J.P. Morgan: Samsung Electro-Mechanics’ third-quarter profit beats expectations: Can higher AI component prices support a new cycle of earnings growth?

What stood out in the third-quarter results?

In the third quarter of 2026, the company reported revenue of 3.763 trillion Korean won, up 30.3% year on year, 1.5% above J.P. Morgan’s forecast but 1.3% below market consensus. Operating profit was 691 billion Korean won, up 165.5% year on year and 14.5% and 4.7% above the bank’s forecast and market consensus, respectively.
Profit outperformed revenue: sales in the components business, which includes MLCCs, and the substrate business rose 14.2% and 21.7% quarter on quarter, respectively. However, net profit for the quarter was 469 billion Korean won, 5.6% below market consensus.

Management said rising AI chip power consumption and an increasing number of chips in system-in-package designs are driving up MLCC usage. Meanwhile, production of high-end AI products consumes more capacity, tightening supply. MLCC shipments rose and inventories fell in the third quarter, while the blended average selling price increased by more than double digits quarter on quarter, driven by a higher share of premium products.
J.P. Morgan expects the blended average selling price of MLCCs in US dollars to rise 87% and 38% in 2027 and 2028, respectively, and assumes four rounds of price increases from the fourth quarter of 2026 through the fourth quarter of 2028. On that basis, the bank expects the components business’s operating margin to rise to 36%–43% over the next two years, above the roughly 30% peak of the previous cycle in 2018.
The company expects data-center-grade MLCCs to account for nearly 35% of sales by the end of 2026, rising to 40%–50% over the following year. Management also expects demand to continue growing in the fourth quarter, with a higher share of premium products and higher average selling prices driving a significant increase in revenue.

The company said major technology customers have signed long-term agreements supporting its expansion of FCBGA substrate capacity for AI data centers in South Korea and Vietnam. The projects are scheduled to enter mass production in phases from 2027 and begin contributing significant revenue in 2028.
J.P. Morgan expects improved product mix and price increases for comparable products together to lift ABF substrate average selling prices by 30% in 2027 and 20% in 2028, driving the operating margin above 30%. The company’s substrate business margin had already risen to just over 20% in the third quarter, its highest level since the third quarter of 2022.
Embedded substrates place passive components such as capacitors inside the substrate, shortening power delivery and signal paths. The company said it has begun supplying major technology customers and plans to expand the business in 2027; J.P. Morgan believes growing orders will help increase the share of server products in ABF sales.

J.P. Morgan raised its operating profit forecasts for 2026–2028 by 13%–23%. Its adjusted earnings per share forecasts for 2027 and 2028 are 59,342 Korean won and 99,952 Korean won, respectively, approximately 25%–33% above market consensus. The bank maintained its overweight rating and raised its December 2027 price target from 2.4 million Korean won to 2.6 million Korean won.
The price target uses a price-to-earnings multiple of 25 times forecast 2028 earnings per share, down from the 27 times previously used; the increase in the target price mainly reflects higher earnings forecasts.
Capacity expansion will consume cash upfront. The bank forecasts cumulative capital expenditure of 11.7 trillion Korean won for 2026–2028, above the 2.786 trillion Korean won spent in 2023–2025; it expects free cash flow of negative 677 billion Korean won in 2027, compared with positive 257 billion Korean won in 2026.
The bank cautioned that a slowdown in AI capital spending could put pressure on MLCC and substrate demand and prices. A slower-than-expected ramp-up of substrate capacity in Vietnam, a sharp appreciation of the Korean won, or production yield problems would also affect its assessment.