Samsung Electronics (SMSN:LN) Last Update 7/30/21
Related: AAPL
% of Stock Price
Revenue
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Samsung Electronics
$1.81Mil
Yours
Trefis Price
 
Top Drivers for Period
Key Drivers
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RECENT NEWS AND ANALYSIS

Potential upside & downside to trefis price

Samsung Electronics Company

VALUATION HIGHLIGHTS

  1. Semiconductor constitutes 51% of the Trefis price estimate for Samsung Electronics's stock.
  2. Mobile Phones constitute 21% of the Trefis price estimate for Samsung Electronics's stock.

WHAT HAS CHANGED?

Samsung's Q2 2021 Results

Samsung posted a strong set of Q2 2021 results, with revenues growing 20% year-over-year to 63.67 trillion won ( about $56 billion) and net profit rising 73% to 9.63 trillion won (around $8.4 billion). Earnings growth was driven primarily by the memory business, which continued to witness robust demand from the server and PC market. Samsung's appliances business also posted a 32% jump in sales, driven by stay-at-home trends through the Covid-19 pandemic.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of Samsung's value that present opportunities for upside or downside to the current Trefis price estimate for Samsung:

Memory Revenues

  • Memory revenues: Samsung's valuation is significantly impacted by its memory revenues, which in turn depend on supply-demand and pricing conditions in the memory market. Memory revenues increased from levels of about $29 billion in 2016 to $60 billion in 2018, driven by higher pricing for both DRAM and NAND memory chips, which saw demand soar, driven by cloud computing and mobile markets. However, the metric fell to $40 billion in 2019 as memory prices cooled off, and stood at $44.4 billion in 2020. We expect Memory Revenue to rise to close to $79 billion by 2027. However, if revenues post stronger growth, rising to levels of around $100 billion by 2027, there could be a 10% upside to our price estimate.

Mobile Phones

  • Samsung's Mobile Phone Revenues: Samsung's mobile revenues declined from about $84 billion in 2017 to about $78 billion in 2019 and 2020. We believe that Revenue growth is likely to remain in the low single-digit level, in the long run, rising to about $85 billion by 2027. However, if Samsung is able to actually improve revenues to levels of around $100 billion by 2027, there could be a 10% upside to our price estimate.

BUSINESS SUMMARY

Samsung Electronics is a South Korean company principally engaged in the manufacture of consumer electronic products. The company broadly operates its business through two divisions:

1. The End Retail Product division

This division is further divided into two business segments - Telecom and Consumer Electronics. The Telecom segment makes information and communication products such as smartphones and telecom equipment for 4G/5G networks. The consumer electronics 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 four different business segments as shown in the Trefis visualization for Samsung's value.

SOURCES OF 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.

Semiconductor Business

Samsung's semiconductor division, which we believe is the company's most valuable segment, manufactures NAND, DRAM, and other semiconductor products such as system large-scale integrated circuits (LSI) , 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.

Telecom (Mobile Phones)

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 make the telecom division Samsung's second most valuable division.

KEY TRENDS

Samsung's Challenges In The High-End Smartphone Market

The high-end of the smartphone market is becoming more competitive with Apple now offering a slew of flagship devices (four new iPhones were launched in FY'20 alone) and Chinese vendors such as Xiaomi and Oppo increasingly focusing on premium devices as volume growth cools in the broader smartphone market. Although Samsung has an edge over rivals in terms of securing the latest hardware such as displays and cameras from its in-house component business, it faces a handicap in the software and services space, where rivals like Apple have a clear edge.

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 undersupplied, 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 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 January 2021, the broader semiconductor market, including DRAM remained undersupplied and this is likely to cause prices to rise over the next few quarters.