April 3, 2019 / 3:47 AM / 23 days ago

Breakingviews - Two big clouds eclipse Samsung's silver lining

A Samsung employee arranges the new Samsung Galaxy S10e, S10, S10+ and the Samsung Galaxy S10 5G smartphones at a press event in London, Britain February 20, 2019. REUTERS/Henry Nicholls

HONG KONG (Reuters Breakingviews) - Samsung Electronics investors seem to be focused on the silver linings rather than two big clouds. South Korea’s $270 billion semiconductor manufacturer already flagged a dismal first quarter because of a glut in memory chips. A more concentrated market means supply cuts could lift prices, but it may take time to overcome stockpiled inventories and weaker demand.

The Seoul-based company is due to provide first-quarter earnings guidance on Friday, two weeks after it delivered a rare profit warning. It noted that prices for its flagship products – which account for roughly three-quarters of operating profit – would be worse than expected. The investment community is bracing for earnings to halve to 6.1 trillion won ($5.4 billion) from a year earlier, according to the average of revised analyst estimates compiled by Refinitiv.

A strong recovery is being anticipated, however. After falling to a two-year low in early January, Samsung shares have rallied by more than a fifth. The stock fetches nearly 11 times expected earnings over the next year, well above the multiple commanded by rivals and its own five-year average of just eight times.

One reason is the oligopoly. Samsung, SK Hynix and Micron now account for nearly all the so-called dynamic random access memory, or DRAM, chips used in PCs, servers and smartphones. And the trio – down from over 10 competitors a decade ago – is moving quickly to curb production and cut capital spending.

As in earlier boom-and-bust cycles common for semiconductors, Samsung and its rivals will have to grapple with big surpluses. Manufacturers are sitting on over six weeks of stock, while customers on average have five weeks’ worth, industry tracker Trendforce estimates. Even after factoring in slower supply growth this year, consumption would need to jump a whopping 49 percent in 2019 for prices to rebound, analysts at Morgan Stanley reckon.

That level is questionable. Shipments of smartphones are shrinking globally. Meanwhile, growth in so-called hyperscale servers used for big data and cloud computing have been more hype than reality. And despite all the excitement over artificial intelligence and next-generation wireless technologies, their growth – and commensurate chip needs – will take time. Basic economic forces may yet rain on Samsung’s parade.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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