Samsung Gets Whacked

Samsung (NASDAQOTH: SSNLF  ) is well known as the world's largest handset vendor. In addition, it is world's top DRAM vendor, a top display vendor, and a fast-growing semiconductor foundry. The company's growth over the last several years has been nothing short of impressive as it has ridden the secular smartphone and tablet waves to immense profit growth. However, not all is rosy for Samsung's share price in light of recent analyst comments.

Two negative trends
While some may initially believe that any "weakness" over at Samsung is due to "weak" sales of its flagship Galaxy S or Note products, this actually doesn't appear to be the problem at all. There are two negative trends that analysts cited for their cautious outlooks for Samsung's current quarter:

  1. Unfavorable won/dollar exchange rate

  2. Margin compression in the firm's OLED business

The exchange rate thing
The first problem for Samsung is that the won has been gaining strength against the US dollar. Now, analysts believe that Samsung mainly uses the US dollar for transaction settlement. Now, if the won gets stronger, then that would imply fewer won per dollar, and since Samsung reports its results in won, this is a negative for Samsung's profitability.

OLED margin compression
The next problem is over in Samsung's display division. It seems that the OLED display market is becoming more fiercely competitive which some analysts believe will drive margin compression. While margin compression is never pretty, the demand for OLED displays is likely to continue to be healthy which – from a longer term perspective – would still drive increased operating profits even at a lower gross margin level.

Should Samsung investors be afraid?
Frankly, while Samsung's stock is taking a beating as a result of these two forces, it's important to note that these aren't deal killers from an operational perspective. Yes, the currency trends will negatively impact profitability, and sure, advanced displays are becoming more of a commodity, but Samsung Electronics derives the vast majority of its robust operating profitability from smartphones.

No, what would be much more frightening to Samsung investors would be share losses in the handset/tablet market. Interestingly enough, Samsung continues to gobble up tablet share on a year-over-year compare (thanks to a broad variety of devices at each price point) as well as global smartphone share. These trends still look quite favorable for this South Korean giant.

Some risks loom, however
If Apple (NASDAQ: AAPL  ) were to, say, go ahead and release a larger iPhone, then it could continue to erode Samsung's high end, highly profitable share due simply to the brand loyalty that it commands. However, it must be noted that Samsung's gigantic marketing budget and willingness to make many variants of its designs could prove effective in countering any new Apple smartphone releases. This will be one of the key things to watch in 2014.

Another risk could be the rise of another Android smartphone vendor such as Lenovo or, probably more threateningly, Motorola Mobility under the wing of Google (NASDAQ: GOOGL  ) . Remember, while Samsung does use Google's Android OS, it is also trying its very hardest to "own" its own ecosystem.

If Samsung ends up doing that, and if other Android players don't start taking meaningful share back, then this would be bad news for Google. So, clearly, Google is going to want to sell its own devices as well as enable other non-Samsung users of Android (like Lenovo, LG, HTC, and so on). It will be interesting to see how aggressively Google pushes here longer term.

Foolish bottom line
While the won/USD exchange rate isn't headed in a favorable direction for Samsung and while the OLED business is seeing margin compression, it's not "doomsday" for Samsung. However, for more structural risks, it'll be interesting to see how much more aggressive Apple gets with its iPhone/iPad lineup and what Google via Motorola Mobility brings to the mobile landscape – especially since the bulk of Samsung's products come from mobile devices, not displays.

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Read/Post Comments (5) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 02, 2014, at 3:59 PM, st0815 wrote:

    The Won appreciating also means that Samsung stock will be worth worth more (in dollars). This past year, Samsung's stock chart looks a lot better if drawn against the dollar instead of against the Won.

  • Report this Comment On January 02, 2014, at 4:08 PM, zippero wrote:

    Ashraf, wow, it takes you only one day to do a complete about-face and agree with my comments at SeekingAlpha that Samsung is indeed crashing, which you were ridiculing just 36 hours ago. But if you follow the Korean media like I do, you'd know it's the Galaxy S4's poor sales which are the cause of Samsung's earnings miss, not currency fluctuations or OLED or whatnot that U.S. Reuters claims. Galaxy S4 sales are running just 3 million a month now, and you SHOULD know this since a month ago you wrote an article saying the Galaxy S4 sales were "sputtering."

  • Report this Comment On January 02, 2014, at 4:14 PM, zippero wrote:

    Samsung's profits mostly come from smartphone sales, especially high-end smartphone sales like the Galaxy S4, so when the Galaxy S4's sales drop off a cliff like they're doing due to lack of 64-bit Android OS, it hits Samsung's profits in the most meaningful way. From the Dec. 28 Korea Economic Daily's article "Samsung’s Electronics Affiliates Hit by 'Galaxy S4' Shock":

    "Samsung Group’s electronics affiliates are engulfed in a shock ignited by the Galaxy S4. Many forecast that Samsung Electro-Mechanics, Samsung Display, and Samsung SDI are expected to report disappointing fourth-quarter performances, which would be even lower than their lower-than-expected third-quarter performances.

    Key factors behind their sluggish financial performances include the sluggish sales of Galaxy S4 which was expected to be sold more than 7 million units a month but its monthly sales fell to 3-4 million units in the fourth quarter."

  • Report this Comment On January 02, 2014, at 4:23 PM, zippero wrote:

    After falling 4.59% yesterday, Samsung is now at 1,309,000 won, which is down 17.4% from its 1,584,000 52-week high. Don't be surprised if Samsung drops below its 1,209,000 won 52-week low in the near future as Apple's 64-bit iPhone 5S and iPhone 6 continue to crush Samsung throughout 2014 and even into 2015, as Google puts plans for a 64-bit Android OS on the backburner. There are just too many problems with Android 4.3 and Android 4.4 KitKat bugs troubling even Google's own newest Nexus phones and tablets to even consider coming out with a 64-bit Android OS anytime soon.

  • Report this Comment On January 02, 2014, at 9:46 PM, Dadw5boys wrote:

    The reason sales are down is the quality of their previous products. The S2 and 10.1 tablet have all the things most people need even students. My whole family has them and love them. Samsung will have problems competing against their own products, because so many people are buying up their S2, S3 and 10.1s. Download updates and you have one nice piece of tech.

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