Samsung’s Q3 Profits Expand As Memory Market Tailwinds Help Mask Note 7 Impact

Samsung Electronics (OTC:SSNLF) published a stronger-than-expected set of preliminary Q3 results last week, indicating that its operating profits likely rose 5.5% year-over-year to about 7.8 trillion Korean won ($7 billion), while revenues likely declined 5% to about 49 trillion won ($44.2 billion). Although the company didn’t provide additional color on the numbers, it’s possible that profitability was aided by stronger memory prices and display shipments, which helped to more than offset the initial impact of the Galaxy Note 7 recall process. Revenues were likely hurt by currency headwinds, as the Korean won was up by roughly 5% year-over-year versus the U.S. dollar over Q3. Below we outline some of the key factors that possibly drove the firm’s performance over the last quarter.

We have a $1,370 price estimate for Samsung, which is roughly in line with the current market price.

See our complete analysis for Samsung

Stronger DRAM and NAND Market Conditions 

Samsung’s semiconductor business is likely to be witnessing improving profitability, amid strong bit growth and more favorable pricing for DRAM and NAND memory. DRAM prices have seen an uptick over the last quarter, driven by restocking demand from OEMs and a weaker production mix for PC DRAM, which has resulted in under-supply. Demand has also been relatively strong, with PC and smartphone vendors improving per-device memory content. For example, DDR3/DDR4 RAM spot prices are up by over 30% compared to their September contract prices, per DRAMeXchange. NAND pricing has also held up well, driven by higher memory content for devices. For example, Apple, one of the largest NAND consumers, has effectively doubled storage capacity across its flagship smartphone lineup. Samsung’s display business is also likely to have performed well this quarter, benefiting from strong demand for small-size OLED panels, which are sought after for premium smartphones.

S7 Recall Likely Didn’t Impact Earnings Significantly

Samsung had to recall about 2.5 million units of its Galaxy Note 7 in September after several units exploded due to a battery defect. However, the recall process doesn’t seem to have meaningfully impacted the firm’s Q3 profitability. This is partly because the cash costs relating to the recall should be relatively manageable for a company of Samsung’s size (roughly $1 billion, per our estimates). Moreover, the real damage may only be felt in the coming quarters, as Samsung faces the risk of lower sales for its premium devices on account of potential customer trust issues and weaker brand equity. Samsung has now suspended production of the Note 7 after reports that some replacement units reported battery issues, and we believe it is possible that the firm will have to pull the plug on the device, which many reviewers praised as the firm’s best smartphone design to date.

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