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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 Average Selling Price per Gigabit of DRAM Memory: Samsung's Average Selling Price per Gigabit of DRAM Memory has continuously fallen from around $1.55 in 2011 to about $0.70 in 2015 due to increasing supply and competition in the DRAM markets. We expect DRAM prices per Gb to continue to fall by over 20% year-over-year for the period under forecast to about $0.23, as memory density increases and the proportion of mobile DRAM (which is cheaper) in the company's shipment mix increases. However, should the company's prices decline at a slower rate to about $0.40, this could result in a 10% upside to our current price estimate. If prices decline to below $0.20 per Gb by the end of the forecast period, this could result in a 7% decline in our price estimate.
- Samsung's Mobile Phone Market Share: We estimate that Samsung's mobile phone market share will decline from around 22% in 2016 to about 20% by the end of the Trefis forecast period amidst intense competition from local vendors in emerging markets such as China and India and increasing commoditization in the smartphone market. However, if Samsung's is able to offer more attractive products at affordable price points, and maintains its market share at about 22% at the end of our review period, this could result in a 10% upside to our price estimate. On the other hand, if the company's market share declines to about 15%, this could reduce our price estimate by around 10%.
- Samsung's Average Mobile Phone Selling Price: Smartphone adoption increased Samsung's average selling prices (ASPs) from about $145 in 2011 to about $255 in 2013. However, the number declined to about $220 in 2014 amid increasing saturation and competition in the smartphone market, while falling further to about $196 in 2015. We currently forecast that Samsung's ASPs will decline by around 15% by the end of the Trefis forecast period as the smartphone business becomes more commoditized. However, if ASPs remain steady at current levels, there could be a 5% upside to our price estimate. If the competitive nature of the smartphone market puts more intense pricing pressure on Samsung, it would have a negative impact on our price estimate. If ASPs decline by around 20% from current levels, there is a downside of 5% to our current price estimate.
Samsung Electronics is a South Korean 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 smartphones and telecom equipment for 3G/4G networks. The digital media segment manufactures and sells televisions (TVs), air conditioners, refrigerators and other appliances.
2. The component division
This division produces electronic components that are used by Samsung and are also sold to third parties. 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 LCD displays and OLED displays used for TVs, notebooks, smartphones and other products.
In our model, we divide Samsung's business into the four different business segments as shown in the Trefis visualization for Samsung's value.
We estimate that Samsung's telecom and semiconductor divisions are the most valuable businesses for the company, accounting for nearly 60% of the company's total value.
Telecom (Mobile Phones)
Telecom is the most valuable segment for Samsung and accounts for close to 30% the company's valuation, per our estimates. The large size of the mobile phone market, the higher replacement rate of mobile devices as well as the reasonably high margins that the business commands makes the telecom division the firm's most valuable division.
Samsung's semiconductor division manufactures NAND, DRAM and other semiconductor products such as system large scale integrated circuit (LSI) products, application processors and image sensors. While the business is quite capital intensive, it also has the highest margins among Samsung's various business verticals. Samsung is the world's largest manufacturer of digital memory, with over 30% market share of the branded DRAM and NAND market. The company invests significant sums on R&D and has been able to consistently deliver innovative semiconductor products. Additionally, the company's large volumes allow it to leverage significant economies of scale.
Samsung's Challenges In The High-End Smartphone Market
Smartphone penetration levels have been increasing in developed markets where premium smartphones find the most takers. In the United States for example, smartphone penetration (as a percentage of mobile users) stood at close to 80% as of Q4 2015 according to comScore Considering that smartphone replacements, rather than adoption is likely to drive further sales, shipments in these markets could grow at a slower pace than before. IDC expects U.S. smartphone shipment growth to expand at 2.4% CAGR between 2015 and 2019 and it is possible that there could be declines in other markets such as Japan. Samsung has been looking to address the market headwinds with heavy investments in R&D and product development, churning out differentiated products such as the Galaxy S7 Edge. However, Samsung faced a significant setback in Q4 2016, after it had to pull the plug on its flagship Galaxy Note 7 - a well reviewed device that was seen as the firm's most ambitious effort to take on the iPhone - after several units of the device exploded on account of a manufacturing defect. Samsung received a lot flak regarding its handling of the recall and it's possible that this could create customer trust issues, impacting sales of its premium smartphones in the near-term.
Pricing pressure for low and mid-tier Handsets
Although emerging markets such as India still offer scope for near double-digit (or higher) smartphone shipments growth, realizing attractive pricing and margins is proving tricky. Local manufacturers have been offering smartphones with attractive specifications at affordable prices, appealing to aspirational yet price conscious customers. Some local manufacturers sell their products at near cost, aiming to eventually turn a profit as component prices fall, or by providing other internet based services. The Chinese market for instance is currently dominated by local players such as Huawei and Oppo, while vendors such as Micromax and Intex have made significant inroads into the Indian smartphone market.
Mobile devices driving demand for NAND and mobile DRAM
Mobile devices such as smartphones and tablets have been driving up demand for NAND memory. Although smartphones sales are slowing, while tablet shipments have actually declined, the demand from this market should continue to grow at a robust pace, as the NAND memory density of these devices rises. Smartphones are increasingly sporting higher resolution camera and displays, which will require a greater amount of memory to store such high-definition content.
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 that are more typical of commodity DRAM. Samsung for instance has been expanding manufacturing of its 20nm-class of DRAM of late, in order to drive profitability and drive product differentiation.
Mobile DRAM shipments were projected to reach 20.5 billion Gb
in 2015, up 12x from 2010.
Cyclical nature of memory markets
The DRAM and NAND memory business is largely cyclical, since the products are largely commoditized and also because lead times for bringing on new manufacturing capacity are quite long. The business cycle comprises four phases.
1. When the memory markets are under supplied, it results in strong pricing and profitability for vendors. This prompts companies to construct, equip or contract new production facilities to increase capacity. The lead time for constructing new facilities typically averages 1 to 2 years for for DRAM.
2. When new capacity comes online, the memory markets will be oversupplied and this results in falling pricing and profitability for vendors. Companies become more circumspect with respect to their capex plans at this juncture and the focus shifts towards driving cost efficiencies.
3. Prices continue to fall and often approach cash cost levels. The lower prices typically lead to higher demand (particularly for NAND memory, which sees greater elasticity)
4. The reduced supply brought about by lower investments in fabrication capacity begins to help pricing, as demand is stable/growing. The improved pricing, coupled with lower costs begins to help vendors improve profitability.
As of late Q3 2016, the DRAM market appeared to be entering a phase of under supply, particularly for PC DRAM chips.
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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