Scenarios That Could Impact The Valuation Of Samsung’s Semiconductor Division

The last few quarters have been difficult for Samsung Electronics (PINK:SSNLF). The company’s quarterly operating profits have dropped for six straight quarters, as its flagship smartphone business reeled under intense competition from Apple’s big-screen iPhones and value offerings from Chinese manufacturers. Samsung’s stock price has also been quite volatile, and is down by about 15% from its 2014 highs. However, there has been a bright spot through the turmoil, as the company’s semiconductor business saw reasonably strong revenue growth and margin expansion, driven by tighter supply in the DRAM market and some early-mover advantages relating to process technologies. Samsung’s semiconductor business accounts for about 40% of our $1,355 price estimate for the company.  In this note, we take a look at scenarios relating to Samsung’s DRAM business and its logic chip business that could result in a meaningful upside to its stock price.

We have a $1,355 price estimate for Samsung, which represents an upside of about 15% to the current market price.

See our full analysis for Samsung Electronics

10% Upside If DRAM Prices Fall At Slower Pace 

DRAM is a type of random access memory used in electronic devices such as PCs, laptops, smartphones and tablets. Prices for DRAM chips are very volatile and cyclical and Samsung hasn’t been able to reap consistent earnings from this business, despite its leadership position in the market. Per-gigabit prices for DRAM have fallen by an average of over 25% each year between 2007 and 2012, according to our estimates. However, prices remained relatively stable through 2013 and 2014, owing to a supply crunch caused by years of cautious investment by vendors in the commodity DRAM space and also due to a fire at a Chinese fab owned by SK Hynix during 2013, which took the plant offline. However, prices look set to decline over the long-term. Our $1,355 price estimate for Samsung assumes that its DRAM prices will fall by more than 15% this year to about $0.83/gigabit, with the declines moderating to levels of 10% per year by the end of the forecast period, as the industry tilts toward a supply-demand balance and as per-bit fabrication costs decline.

However, there could be a notable increase to our price estimate if ASPs stabilize in the near-term or decline at a slower pace, owing to Samsung’s technological advantages or better than expected market conditions. For instance, Samsung has been focusing on higher value DRAM chips such as DDR4/LPDDR4 and has also been transitioning its DRAM manufacturing to a more cost competitive 20-nm process, which allows for higher-performance and higher-density memory. The company is expected to use this node technology for over 50% of its DRAM output this year. ^[1] Alternatively, the broader memory market could benefit from higher memory densities for mobile devices or better than expected PC sales, which would also bolster pricing. Under this scenario, if prices decline at a slower rate, falling to just about $0.48/gigabit by the end of the forecast period (versus our current estimate of under $0.40/gigabit), while overall semiconductor margins level off at about 49%, this would result in a 10% upside to our price estimate for Samsung.

10% Upside If Foundry Unit Stays Ahead Of Process Technology Curve

Samsung has been increasingly investing in its logic-chip unit as a means to diversify semiconductor revenue away from the cyclical memory markets. A bulk of Samsung’s non-memory semiconductor sales come from its foundry operations, which contract manufactures logic chips for third-parties, while a smaller portion comes from proprietary chips designed and developed by the firm. While business dipped by about 24% in 2014, owing partly to lower business from Apple (which switched to rival foundry TSMC for its A8 app processors), 2015 appears to be a promising year, given that the company will be ramping up production of its highly anticipated 14-nanometer (nm) FinFET process technology. The nanometer measurement, which is a key metric in the semiconductor fabrication business, is an indicator of the space between transistors on a chip. The 14-nm process, which is among the most advanced logic process technologies in the industry, will enable vendors to offer smaller, faster and more battery-efficient processors.

The new technology is expected to help Samsung win business from Apple (for the A9 chip on its upcoming iDevices), Qualcomm (for the Snapdragon 820 app processor) and Nvidia. The company is also working on next-generation chips, using technology based on 10-nm process, with plans to begin mass production by the end of 2016. Samsung has been investing considerably in the processor space, with UBS AG estimating that CY 2015 capex for the unit could rise to $4.9 billion from about $3.7 billion a year ago. We currently expect sales of Samsung’s non-memory semiconductor business to come in at around $9.5 billion this year, rising to about $13.5 billion by 2021. However, if the company is able to keep ahead of the process technology curve, allowing it to win more business and improve non-memory semiconductor sales to about $20 billion by the end of the forecast period, while improving semiconductor margins to about 49% in the same timeframe, this would result in a 10% upside to our current price estimate.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

1. Samsung to adopt 20nm process for over 50% of its DRAM output in 2015, say sources, Digitimes, February 2015 [↩]