Samsung's Stock Is on a Roll

Shares of Samsung Electronics (NASDAQOTH: SSNLF  ) have been on an absolute roll since late March. Shareholders in the South Korean giant have seen the share price appreciate by a healthy 16%, with momentum apparently fueled by the apparent success of its recent flagship smartphone, the Samsung Galaxy S5. The interesting thing here is that despite the long-term fears of smartphone and tablet commoditization (mobile devices account for about 75% of the company's operating profit), the company's shares seem to have priced this in.

Samsung is dirt cheap and downside seems limited
Shares of Samsung Electronics trade at just 7.32 times earnings. To put this into perspective, rival Apple (NASDAQ: AAPL  ) trades at 14.45 times earnings. Now, of course, Apple's got a stickier moat and stronger brand than Samsung does, but Samsung Electronics as a whole is quite a bit more diversified than Apple is. Samsung is the world's leading vendor in DRAM and seems to be very aggressively pursuing the semiconductor logic foundry market dominated by Taiwan Semiconductor (NYSE: TSM  ) .

Will Samsung's smartphone margins stay high forever? Probably not. Will the growth in mobile devices continue to be as robust as it has been over the last several years? No, again, probably not. However, even if Samsung's mobile revenue stagnate, the odds are very good that it will eventually grow to be the No. 2 semiconductor logic foundry after TSMC and that the DRAM market will continue to boom for quite some time.

Even if Samsung's operating profit were cut in half, it still wouldn't be particularly expensive relative to many of its peers in either the consumer electronics space (many of whom are losing money) or in the semiconductor market (TSMC trades for 17.56 times earnings and commands a $107 billion market capitalization). The shares really are cheap, and the downside -- for those who can actually get a hold of the shares (there is no ADR for U.S. investors to purchase) -- seems limited.

How about the Apple threat?
The big "threat" to Samsung's big profit center is the upcoming "large" iPhone from Apple as well as the bevy of competing Android devices from the likes of LG, HTC, and Motorola. If the iPhone 6 debuts later this year and starts wreaking havoc on Galaxy S and Galaxy Note market share, then the stock could begin to stagnate or decline.

Further, while the Galaxy S5 is putting up great sales numbers so far, there is risk that this popularity could be fleeting. Again, if Samsung were a highflier commanding a premium multiple, then shareholders should be nervous, but at about seven times earnings, it all seems baked in and the risk really does seem to be to the upside. The better way, it seems, to play a Samsung Galaxy S5 or Note 4 "flop" in the face of Apple's iPhone 6 would be to go long Apple rather than short Samsung.

Foolish bottom line
At the end of the day, Samsung is an incredibly powerful company that has benefited greatly from its aggressive efforts to capture the mobile revolution. While the margins and the profitability may not last forever, the stock is just so cheap that it seems even the worst case scenario is priced in. For now, Samsung's shares are likely to continue to trend up until we get a data-point suggesting that Galaxy S5 sales aren't all they're cracked up to be, which may or may not be the case.

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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 May 20, 2014, at 5:29 PM, zippero wrote:

    Ashraf, don't be fooled by Samsung artificially inflating its price to restore confidence while Chairman Lee Kun-hee is in the hospital due to his heart attack. They do this sort of thing all the time, but it is temporary, and no amount of pumping can prevent Samsung's inevitable reversion back to a low-margin components supplier at best (which the Chinese will also put out of business in a few years, while the Apple iPhone 6's kill off Galaxy S's and Notes). Thus, Samsung's low P/E is well-deserved and appropriate as Samsung's margins keep dropping, while Apple's keep rising. From a big-picture point of few, Korea Inc. is getting supplanted by China Inc., just as Japan Inc. was supplanted by Korea Inc. earlier, and Korea just doesn't have the technology, culture, education system, demographics, domestic market, engineering grads, etc. to prevent the passing of the baton to China in all its major export industries like smartphones, chips, cars, ships, etc. that still make up a whopping 50% of its GDP. if you want a horse to bet on, bet on emerging Chinese component makers and Apple, which China will never displace.

  • Report this Comment On May 21, 2014, at 11:05 PM, TMFAeassa wrote:

    Thanks for the comment, zippero! :-)

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