Samsung Gets Whacked
Samsung is well known as the world's largest handset vendor. In addition, it is world's top DRAM vendor, a top display vendor, and a fast-growing semiconductor foundry. The company's growth over the last several years has been nothing short of impressive as it has ridden the secular smartphone and tablet waves to immense profit growth. However, not all is rosy for Samsung's share price in light of recent analyst comments.
Two negative trends
While some may initially believe that any "weakness" over at Samsung is due to "weak" sales of its flagship Galaxy S or Note products, this actually doesn't appear to be the problem at all. There are two negative trends that analysts cited for their cautious outlooks for Samsung's current quarter:
Unfavorable won/dollar exchange rate
Margin compression in the firm's OLED business
The exchange rate thing
The first problem for Samsung is that the won has been gaining strength against the US dollar. Now, analysts believe that Samsung mainly uses the US dollar for transaction settlement. Now, if the won gets stronger, then that would imply fewer won per dollar, and since Samsung reports its results in won, this is a negative for Samsung's profitability.
OLED margin compression
The next problem is over in Samsung's display division. It seems that the OLED display market is becoming more fiercely competitive which some analysts believe will drive margin compression. While margin compression is never pretty, the demand for OLED displays is likely to continue to be healthy which - from a longer term perspective - would still drive increased operating profits even at a lower gross margin level.
Should Samsung investors be afraid?
Frankly, while Samsung's stock is taking a beating as a result of these two forces, it's important to note that these aren't deal killers from an operational perspective. Yes, the currency trends will negatively impact profitability, and sure, advanced displays are becoming more of a commodity, but Samsung Electronics derives the vast majority of its robust operating profitability from smartphones.
No, what would be much more frightening to Samsung investors would be share losses in the handset/tablet market. Interestingly enough, Samsung continues to gobble up tablet share on a year-over-year compare (thanks to a broad variety of devices at each price point) as well as global smartphone share. These trends still look quite favorable for this South Korean giant.
Some risks loom, however
If Apple were to, say, go ahead and release a larger iPhone, then it could continue to erode Samsung's high end, highly profitable share due simply to the brand loyalty that it commands. However, it must be noted that Samsung's gigantic marketing budget and willingness to make many variants of its designs could prove effective in countering any new Apple smartphone releases. This will be one of the key things to watch in 2014.
Another risk could be the rise of another Android smartphone vendor such as Lenovo or, probably more threateningly, Motorola Mobility under the wing of Google . Remember, while Samsung does use Google's Android OS, it is also trying its very hardest to "own" its own ecosystem.
If Samsung ends up doing that, and if other Android players don't start taking meaningful share back, then this would be bad news for Google. So, clearly, Google is going to want to sell its own devices as well as enable other non-Samsung users of Android (like Lenovo, LG, HTC, and so on). It will be interesting to see how aggressively Google pushes here longer term.
Foolish bottom line
While the won/USD exchange rate isn't headed in a favorable direction for Samsung and while the OLED business is seeing margin compression, it's not "doomsday" for Samsung. However, for more structural risks, it'll be interesting to see how much more aggressive Apple gets with its iPhone/iPad lineup and what Google via Motorola Mobility brings to the mobile landscape - especially since the bulk of Samsung's products come from mobile devices, not displays.
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The article Samsung Gets Whacked originally appeared on Fool.com.Ashraf Eassa has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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