Samsung Projects Record Profits Amid Components Boom, Can The Trend Continue?

Samsung Electronics (OTC:SSNLF) just published its Q2’17 earnings guidance, projecting record operating profits of around 14 trillion won ($12.1 billion), marking an increase of about 72% year-over-year. The company also estimates that revenues will rise by around 18% year-over-year to 60 trillion won ($52 billion). While Samsung did not break out the factors that contributed to the uptick in earnings, it’s likely that the memory business remained a key driver of the firm’s performance, amid soaring demand and pricing for both NAND and DRAM modules. The company is expected to publish its final Q2 figures towards the end of this month. Below, we take a look at some of the possible factors that drove Samsung’s results.

We have a $1,812 price estimate for Samsung Electronics, which is 10% below the current market price.

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DRAM Pricing Remains Favorable

Global DRAM prices have been rising since June 2016, due to higher DRAM content in mobile devices and significant under-supply of PC DRAM, as vendors reduced their production mixes in favor of mobile DRAM. Moreover, global DRAM supply is being slowed temporarily, as major producers transition their fabs to ≤20nm process technologies this year. A wave of consolidation, which has essentially shrunk the industry to three major players (Samsung, Micron and SK Hynix), has also helped to ensure that price increases have been more pronounced compared to past industry cycles. Samsung’s rival Micron reported that its DRAM price realizations rose by 14% sequentially for the quarter ended June 1, 2017, hence it’s possible that we could see similar (or better) improvements from Samsung. There is a possibility that prices will rise further in the near term, given that Micron reportedly suffered a malfunction at one of its Taiwanese fabs, that could result in a 5.5% cut in global DRAM production capacity in July.

Surging Demand For NAND Memory

The NAND market has also been strong, with demand surging and prices rising sequentially over H2’16 and Q1’17. There have been multiple factors driving this trend. For one, device manufacturers are increasing memory density on their devices, on account of higher-resolution cameras and the availability of UHD content. Internet and cloud computing companies have also been boosting SSD capacity on their servers and data centers, driven by the performance, power, and reliability benefits that SSDs offer versus HDDs (hard disk drives). There have been some transitory factors as well. For instance, major manufacturers have been transitioning from 2D planar NAND to 3D NAND, creating some supply constraints. Samsung appears to be ahead of the curve with this transition, as 3D NAND already accounts for a bulk of its output, with the firm intending to shift over half of its production mix to its next generation 64-Layer 3D NAND by the end of this year.

Display Business May Benefit From Mobile OLED Uptake

Samsung’s display panel segment is also likely to have performed well over Q2, driven by demand for mobile OLED displays. OLED displays are much sought-after in the smartphone market, due to their high contrast levels, power efficiency and the design flexibility that they offer vendors. Samsung dominates the small-format OLED market, with a market share that is estimated to stand at over 90%, making the company the biggest beneficiary of the demand growth. During Q1’17, the display unit posted operating margins of around 18%, compared to negative levels in the year ago period and it’s possible that margins could improve further, given higher demand stemming from the launch of new flagships by Chinese manufacturers. The segment’s performance is likely to remain strong in the near-to-medium term, as Samsung is tipped to be the sole supplier of OLED displays for Apple’s 10th anniversary iPhone, likely due in September.

Galaxy S8 Sales Could Help Mobile Division

Samsung’s mobile division could see a sequential improvement in revenues, driven by the launch of the new flagship Galaxy S8 handset. While the company hasn’t divulged shipments figures for the device, the S8 has garnered very positive reviews from critics and early consumer demand is also likely to have been strong, considering Apple’s ageing iPhone line-up, as well as relatively lackluster launches by other Android rivals. That said, price realizations and margins will be a key factor to watch, as Samsung resorted to some discounting in the United States just two months into the product life-cycle – an unusual move by flagship smartphone standards (related: Why Samsung’s Galaxy S8 Is Seeing Deep Discounts). Moreover, the mobile segment typically witnesses higher marketing spending during a new flagship launch, and this could potentially weigh on margins for the mobile division.

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