Why We Are Bearish On Samsung’s Stock After 2017’s Rally

by Trefis Team
Samsung Electronics
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Samsung Electronics’ (OTC:SSNLF) stock is up by close to 40% this year, driven primarily by an increase in DRAM and NAND pricing and the improving performance of its smartphone business.  However, we believe that the stock rally may be somewhat excessive, and are now relatively bearish on Samsung’s stock. Our price estimate for the company’s stock is around $2000, which is roughly 15% below the market price. In this note, we take a look at some of the factors driving our outlook.

See our complete analysis for Samsung

The Memory Cycle Is Peaking Off

The upswing in the memory markets has contributed significantly to Samsung’s profit growth this year. We estimate that  semiconductor operations will account for 60% of Samsung’s operating profits and over 80% of its total profit growth this year. However, the memory cycle appears to be turning. The prices for NAND products are already seeing some moderation.  The under-supply of NAND over the last several quarters was caused by vendors transitioning to their 64- and 72-layer NAND stacking technologies (3D NAND) from 2D NAND.  Most vendors are likely to have reached levels of maturity with their process transitions, which should significantly boost capacity. For instance, DRAMeXchange expects NAND flash bit growth to come in at around 43% in 2018, while bit demand growth is projected to stand at around 38%. This difference could widen in 2019, further impacting NAND prices. While we expect DRAM market conditions to remain relatively tight in early 2018, continued high prices could spur greater investment in capacity, impacting prices from 2019. This could have an adverse impact on Samsung’s overall profitability in the medium term.

Smartphone Business Is Doing Well But Could Face Long-Term Issues

Samsung’s Mobile business has been faring well in recent quarters, with market share rising by 300 bps year-over-year in Q3’17, driven by devices such as the Note 8 and Galaxy S8. However, we believe that the business, which accounts for about 45% of the company’s total revenues, could face longer-term headwinds. In the lower end of the smartphone market, Samsung faces competition from Chinese players, who have been offering increasingly compelling products at attractive price points. Samsung no longer figures on the top five list of smartphone vendors in China, and in India the company has been losing ground to Xiaomi. In the premium end of the smartphone market, the basis of product differentiation is shifting away from hardware to software and services, which have traditionally been a weak link for Samsung. Rival products such as Apple’s iPhone and Google’s Pixel appear better positioned to capitalize on this shift.

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