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Investment Overview for Samsung Electronics (NYSE:SSNLF)
Below are key drivers of Samsung's value that present opportunities for upside or downside to the current Trefis price estimate for Samsung:
- Samsung's Mobile Phone Market Share: We estimate that Samsung's mobile phone market share will decline from around 24% in 2013 to about 17% by the end of the Trefis forecast period. Samsung has been losing market share of late, amidst intense competition from local vendors in emerging markets such as China and India. Things have been difficult in the high end of the market as well, considering the increasing saturation and lack innovation . The company's latest flagship, the Galaxy S5 has met with a lukewarm response from consumers, who view it as just an incremental upgrade over last years S4 model.
Smartphone users are a fickle bunch and could easy shift to other manufacturers and platforms. However, if Samsung's is able to offer more attractive products at affordable price points, and maintains its market share at about 24%, this could result in a 7% upside to our price estimate. On the other hand, if the company's market share declines to about 15%, this could reduce our price estimate by around 5%.
- Samsung's Average Mobile Phone Selling Price: Smartphone adoption has increased mobile phone average selling prices (ASPs) over the last 4 years given that smartphones are sold at a premium to basic feature phones. However, ASP's are poised to see a decline going forward as smartphone sales have overtaken featurephone sales, and replacement of smartphones rather than smartphone adoption is likely to be a key driver of sales going forward. Additionaly, Samsung is heavily invested in developing markets, where local vendors have been offering high-end specifications on low priced handsets. We currently forecast that Samsung's ASPs will decline by around 15% by the end of the Trefis forecast period as the smartphone business becomes more commoditized. However, if ASPs remain steady at current levels, there could be a 5% upside to our price estimate. If the competitive nature of the smartphone market starts exerting more intense pricing pressure on Samsung, it would have a negative impact on our price estimate. If ASPs decline by around 20% from current levels, there is a downside of 5% to our current price estimate.
Samsung Electronics is a South Korea-based company principally engaged in the manufacture of consumer electronic products. The Company operates its business under two divisions:
1. The End Retail Product division
This division is further divided into two business segments - Telecom and Digital Media.
The Telecom segment makes information and communication products such as mobile phones and telecom equipment for 3G/4G networks. The digital media segment manufactures and sells digital televisions (TVs), netbooks, printers, air conditioners, refrigerators and others.
2. The Component division
This division supplies components used in the above mentioned products to Samsung itself as well as other manufacturers. It comprises of two business segments - Semiconductors and Display Panels. Semiconductors include DRAM and NAND flash memory chips, system large scale integrated circuit (LSI) products, application processors and image sensors. Displays include liquid crystal display (LCD) displays used for TVs, monitors, notebooks, personal computers (PCs) and others.
In our model, we divide Samsung's business into the four different business segments as shown in the Trefis visualization for Samsung's value.
We estimate that Samsung's telecom and semiconductor divisions are the most valuable businesses for the company, accounting for nearly 55% of the company's total value.
Telecom (Mobile Phones)
Telecom is the most valuable segment for Samsung and accounts for close 30% the company's valuation. Consumer businesses are more valuable for the company in general and the mobile device business in particular has the highest growth prospects due to the rapid pace of smartphone adoption in both developed as well as developing markets. The huge market size of the mobile phone market, the higher replacement rate of mobile devices as well as the greater margins of this business makes telecom more valuable than digital media for Samsung.
Samsung's semiconductor division manufactures NAND, DRAM and other semiconductor products such as system large scale integrated circuit (LSI) products, application processors and image sensors. While the business is quite capital intensive, it also has the highest margins among Samsung's various business verticals. Samsung is the worlds largest manufacturer of digital memory, with over 30% market share of the branded DRAM and NAND market. The company invests significant sums on R&D and has been able to consistently deliver innovative semiconductor products. Additionally, the company's scale allows it to leverage significant economies of scale.
Feature phone market shrinks; Growth in smartphone market
According to Gartner, smartphones sales exceeded featurephone sales for the first time in 2013, with around 54% of all mobile handsets shipped being smartphones. This trend looks set to continue, with increasing 3G and 4G penetration in emerging markets and lower prices. According to IDC, global smartphones sales are expected to grow at around 8.3% CAGR between 2013 and 2017.
Increasing Saturation in High End Smartphone Market
Smartphone penetration levels have been increasing in developed markets where premium smartphones have typically found the most takers. In the United States for example, smartphone penetration stood at about 65% as of 2013 and the market is approaching saturation. Considering that smartphone replacements, rather than adoption is likely to drive further sales, shipments in these markets could grow at a slower pace than before. For 2014, IDC expects smartphone shipments to mature markets like North America and Europe to drop to single digits while shipments to Japan could potentially decline.
Pricing Pressure For Low and Mid-tier Handsets
Although emerging markets still offer significant scope for volumes growth for smartphone vendors, realizing attractive pricing and margins is proving tricky. Local manufacturers have been offering smartphones with attractive specifications at affordable prices, appealing to aspirational yet price conscious customers. Some local manufacturers sell their products at near cost, aiming to eventually turn a profit as component prices fall, or by providing other internet based services. As of Q2 2014, Samsung lost its top spot in the Chinese smartphone market to upstart Xiaomi.
Tablets and mobile devices driving demand for NAND and mobile DRAM
Consumers are buying tablets and smartphones in increasing numbers, driving up the use of NAND flash memory for such devices. According to IHS iSuppli, NAND flash growth will be supported by tablets and SSD equipped ultrabooks. NAND revenues for 2014 are expected to cross $28 billion in 2014, up from around $21 billion in 2011.
The market for dynamic random access memory (DRAM) will also see healthy growth in the coming years reversing the losses in 2011 due to oversupply problems that caused prices to fall. IHS iSuppli predicts DRAM shipments to reach $40.2 billion in 2016, up more than 35% from $29.6 billion in 2011.
Mobile DRAM has been the most attractive product segment for DRAM vendors. Mobile DRAM production is based on known demand levels, pricing is mostly driven by cost reductions and not by the wild fluctuations of supply and demand more typical of commodity DRAM. Samsung for instance has been expanding manufacturing of its 20nm-class of DRAM of late, in order to drive profitability and drive product differentiation.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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