How Long Can Samsung Continue To Bank On DRAM To Drive Earnings?
Samsung Electronics (OTC:SSNLF) recently published its preliminary earnings guidance, projecting a record operating profit for the third quarter led by solid demand for its DRAM chips, which likely more than offset weakness in the company’s NAND memory businesses. While the company’s operating profit rose by almost 20% year-over-year to 17.5 trillion won ($15.4 billion), revenues are projected to increase by 4.7% year-over-year to 65 trillion won ($57 billion). Below, we take a look at some of the factors that likely impacted Samsung’s performance over the quarter.
View our interactive dashboard analysis, which outlines our expectations for Samsung in 2018.
DRAM Drives Profitability, But The Cycle Could Begin To Turn
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It’s likely that Samsung’s DRAM business remained the key driver of the company’s performance, driven by favorable pricing (prices were up by 14% year-over-year in Q3) and the company’s focus on higher-value products, such as high-density server DRAM. However, it appears that the DRAM market is peaking off. While major vendors including Samsung have been somewhat circumspect about their DRAM capacity expansion plans, there is a possibility that prices could soften due to weakening demand from major consumers including the server market. According to market research firm TrendForce, the price of DRAM is likely to see a sequential drop of 5% in Q4 2018 due to slowing demand. The performance of Samsung’s NAND business is likely to have been somewhat lackluster, as prices have been on the decline with new 3D NAND capacity coming online.
Mobile Business Performance Could Remain Mixed
The performance of the company’s mobile business will remain a key factor to watch. Samsung witnessed a 22% decline in mobile sales during the second quarter, due to the Galaxy S9 handset witnessing a fairly tepid response, as it is perceived as being very similar to the company’s last generation flagship, the Galaxy S8. Moreover, the company’s mid-range phones are facing mounting competition from Chinese manufacturers who are offering phones with high-end specifications at low prices. That said, the launch of the ultra-premium Galaxy Note 9 smartphone over Q3 could have partially mitigated the broader weakness in the business.
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