Will 2016 Be A Tough Year For Samsung ?
Samsung Electronics‘ (OTC:SSNLF) believes that 2016 will be a challenging year for the company, given increased competition in the smartphone business and weak global economic conditions. [1] The company’s CEO in his employee address stated that low global growth will persist in 2016, with greater uncertainty stemming from issues such as financial risks for emerging countries. There was a change in leadership in the company’s mobile business in December 2015, with a new president taking over, who stated that 2016 will be a tough year for the company’s mobile phone division. [2] Samsung is increasing this division’s focus on software in a move to differentiate itself and win back share in an increasingly competitive smartphone market. It is also expanding its mobile payment service in the U.S., allowing its users to shop online using its wallet. While we see these are laudable initiatives, we believe positive results may not be visible in the immediate future.
See our full analysis for Samsung Electronics
Samsung Appears To Be Losing To Apple In The Premium Smartphone Market
According to Canaccord Genuity, Apple claimed 92% of global smartphone profits in the first nine months of 2015, up from 60% in 2013, while Samsung’s share fell from 40% in 2015 to 14% between January-September 2015.
The aggregate industry profits used to calculate profit shares in the above chart include losses made by unprofitable vendors, leading to the combined profit share of Apple and Samsung being higher than 100%. While Apple’s iPhone accounted for only 15% of the global smartphone shipments in the first nine months of 2015, it claimed 92% of the industry’s aggregate profits. [3]. The above chart reveals that Samsung’s loss in profit share is benefitting Apple. Samsung is facing tough price competition from other Android vendors who together hold about 80% of the global smartphone markets, since devices use the same OS and same hardware. Creating compelling software differentiation is Samsung’s hope to improve its average selling price and profitability in the smartphone business. Samsung’s mobile wallet, Samsung Pay, is the most widely used mobile payment service in the U.S. The company is planning to introduce support to online transactions with Samsung Pay and bring it to more handsets in 2016. [4] The mobile phone division accounts for more than 30% of the company’s valuation, according to our estimates and we expect a declining trend in the mobile ASP (average selling price) over our forecast period. Initiatives to create differentiation in its smartphone might help arrest this trend. Moreover, an improvement in ASPs will impact Samsung’s valuation positively.
Other Businesses Might Also Struggle In 2016
Samsung believes that its memory chips business will also face tough competition in 2016. Conditions now are tough, aas noted by one analyst who wrote: “Negative impact from weak demand and falling sales prices for semiconductor and liquid crystal display industries was likely bigger than initially anticipated”. [1] According to Gartner, analysts are seeing a weakness in end user electronics demand in response to an uncertain economic environment. Gartner forecasts a 3.3% decline in the worldwide semiconductor sector in 2016, compared to 2015. [5].
With the smartphone business losing to competition and an uncertain economic environment impacting its other business, the year 2016 appears to be lining up as a challenging one for Samsung. We look forward to getting better sense of things once the company carifies its outlook in coming calls.
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Notes:- Samsung Electronics warns of tough 2016 amid fourth-quarter outlook concerns, Reuters, Jan 3, 2016 [↩] [↩]
- Samsung expects tough 2016 in handsets, The Korea Times, December 2, 2015 [↩]
- Apple Claims 92% of global smartphone profits, Statista, November 2015 [↩]
- Samsung to expand mobile payment service, CIO Today, December 2015 [↩]
- Sluggish PC and mobile demand hits semiconductor sales, ZDnet.com, October 2015 [↩]