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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 increase from 19% to 21% by the end of the forecast period. However, Samsung had only around 14% market share in 2007, and has since gained around 5% market share at the expense of Nokia and RIM. In smartphone sales, Samsung and Apple are vying for the top spot and the former is expected to decisively pull away soon. Its flagship 'Galaxy' products have achieved record success, with the most recent offering Galaxy S3 seeing pre-orders to the tune of 9 million in less than a month since launch. However, smartphone users are a fickle bunch as is evident from the swift fall of Nokia and RIM. Any misstep can be detrimental to the market share of Samsung. A decrease of market share by just 5% reduces its valuation by 6%. However, if Samsung's devices were to have higher adoption rates in emerging markets, where such devices are lower priced than Apple's iPhone, it can stand to gain market share. Our estimate has a 5% upside to it, if it can gain an additional 6% market share from our current estimate.
- Samsung's Average Mobile Phone Selling Price: Smartphone adoption has increased mobile phone average selling prices (ASPs) as smartphones are sold at a premium to basic feature phones. Samsung is heavily invested in developing markets, where its basic feature phones are available at ASPs of $50 and its basic smartphones (with social networking capability) are available at $100. As consumers in developing replace their handsets with smartphones, Samsung can see rising average ASPs for its mobile handsets. We currently forecast that the ASPs will rise initially but fall off in the outer years as smartphones become increasingly commoditized. However, if ASPs continue to rise at the same pace, there is a 5% upside to our current price estimate. If the competitive nature of the smartphone market starts putting pricing pressure on Samsung quicker than estimated, it would have a negative impact on our price estimate. If ASPs decline by around 14% 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 five different business segments as shown in the Trefis visualization for Samsung's value.
We estimate that Samsung's retail products division is the most valuable for the company with both telecom and digital media accounting for a combined 55% of the company's value.
Telecom (Mobile Phones)
Telecom is the most valuable segment for Samsung and accounts for close to a third of 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.
Digital Media & Appliances (TVs, Laptops & Other Appliances)
The other consumer business, digital media and appliances, which sells most of the consumer electronic goods like flat screen televisions, consumer durables, digital cameras and camcorders, DVD/Blu-ray players etc, is the second most valuable segment for Samsung. The growth in this segment is slower as the replacement rates for TVs and consumer durables is far lower than that of mobile phones since the average prices of items are much higher. Moreover, there is a huge untapped market for such goods in emerging markets where the spending is oriented towards consumer durables rather than smartphones.
Feature phone market shrinks; Growth in smartphone market
The feature phone market is shrinking, as they keep getting replaced by smartphones in the developed markets. According to IDC, the feature phone market has shrunk by around 5% in 2011 compared to 2010. We expect this trend to continue for the forecast period.
The market for smartphones is growing at a 23% compounded average growth rate. It's growing 4x faster than the 2 billion unit cell phone market. The growth in smartphones is going to come from 3G and 4G. According to ABI Research, 3G sales will be over 3 billion units from 2011 to 2015 and 4G sales will be around 310 million units.
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 the entry of ultrabooks and tablets and projects it to reach $30.9 billion by 2016, up from $21.2 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.
This has attracted nearly every DRAM maker to come out with its own mobile DRAM product. In the face of such increased competition, the practice of manufacturing mobile DRAM in volumes based on known demand might change, altering the face of the business.
LED-backlit sets show highest growth
LCD TVs with light-emitting diode (LED) backlighting will rise to dominance in the United States for the first time over older-generation, slightly bulkier LCD sets featuring Cold Cathode Fluorescent Lamp (CCFL) technology.
LED-backlit sets are expected to see rapid double-digit growth in the upcoming years as brands focus on marketing this feature and making LED-based models standard in their lineup. The sets will emerge in small- to medium-sized TV panels—specifically in the sub-40-inch range.
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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