Samsung Warns Of Profit Declines Amid Increasing Smartphone Competition

Samsung Electronics (PINK: SSNLF), one of the world’s largest electronics companies, released its pre-earnings guidance for Q3 2014, indicating that it could see a sharp slump in operating profits. The company expects consolidated sales to fall by around 20% year-over-year to around 47 trillion Korean won, while operating profits are expected to fall by around 60% to 4.1 trillion won. ^[1] The company’s smartphone business – which has been one of its key growth drivers over the last few years – is largely responsible for the decline. While Samsung’s high-end smartphone offerings such as the Galaxy S5 aren’t believed to be selling as well as expected owing to increasing competition from Apple, which finally launched large-screen versions of its iPhone, the company’s budget offerings are facing intense price competition from cheaper Chinese vendors such as Xiaomi and Lenovo. Although the company said that smartphone shipments rose marginally during Q3, earnings were impacted by higher sales promotions, which drove up marketing expenses, and lower average selling prices, which were brought about by a greater mix of lower-end mobile devices.

Trefis has a $1,200 price estimate for Samsung, which is about 8% ahead of the current market price. We are currently updating our valuation model and price estimate for Samsung.

See Our Complete Analysis For Samsung Here

Refocusing Growth Strategy Towards Components

While Samsung has been looking to revitalize its smartphone business by offering new low and mid-range devices, as well devices featuring refreshed designs, it could be an uphill task given that the company lacks a meaningful competitive advantage in an increasingly commoditized market. Instead, we believe that the company could be refocusing its growth strategy towards components, an area in which it has advantages owing to its technology and scale. The company noted that earnings from its memory business are expected to improve sequentially, led by strong demand and price stabilization, which was brought about by tighter supply. The company recently announced that it would be investing about 15.6 trillion won (about $14.5 billion) to build semiconductor manufacturing facilities in the Gyeonggi province in South Korea. The plant marks Samsung’s largest initial investment in a semiconductor facility. ^[2]

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1. Samsung Electronics Pre-Earnings Guidance (2014.3Q), Samsung, October 2014 [↩]
2. Samsung to Build $15 Billion Chip Plant as Phones Stall, Bloomberg, October 2014 [↩]