Samsung Preliminary Earnings Hint a Turnaround Is Near for Chips

Samsung is the world’s largest producer of memory chips and smartphones. Photo: Britta Pedersen/Zuma Press

SEOUL— Samsung Electronics Co. ’s expectations for its third-quarter earnings provided some enthusiasm that the beleaguered global tech supply chain could be nearing a rebound.

Samsung, the world’s largest producer of memory chips and smartphones, said it expects a third-quarter operating profit of 7.7 trillion South Korean won ($6.4 billion). That would be a drop of 56.2% from a year earlier—when profit soared to a record high—though it bested a 7.2 trillion won estimate based on analysts polled by S&P Global Market Intelligence.

The South Korean tech giant expects revenue will fall 5.3% to 62 trillion won year-over-year.

“We’re approaching the end of a downturn,” said Avril Wu, senior research director of DRAMeXchange, which tracks semiconductor sales. But, Ms. Wu added, chip prices could still fall until the end of the year before they start growing again.

For much of 2017 and 2018, Samsung rode a boom of memory chip sales that drove up prices and left the company with a treasure trove of profit. Operating profit peaked at 17.6 trillion won in the year-earlier third quarter.

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But global trade uncertainties this year have curbed buyers’ appetite for new smartphones, electronics gadgets and data servers—a trend that has undercut demand for components—like chips and displays—where Samsung is dominant. Semiconductor makers, eager to feed demand that was once rampant, produced too much and ended up with unsold supply. As a result, prices plunged.

The company’s earnings have slumped; profits for three straight quarters declined from a year earlier. And when Samsung reports full results later this month, the South Korean tech giant is expected to extend that downward streak to a full year.

Investor optimism for Samsung and other global tech manufacturers suggest potentially better days ahead. For the three months ended Sept. 20, contract prices for DRAM and NAND, two major types of memory chips, fell from the quarter before by as much as 20% and 10%, respectively, according to TrendForce, a market research firm.

But those pricing dips are milder than the prior quarter-to-quarter drop, when DRAM slid by as much as 25%, and NAND fell about 20%, TrendForce says.

Samsung’s shares have rebounded about 23% this year. Despite the string of record results, investors sold off their positions last year anticipating a semiconductor slowdown.

Industry analysts say Samsung’s better-than-expected estimated results were driven by an uptick in chip demand from electronics makers in addition to a weakened local currency that favors the export-heavy company. Last year, the Suwon-based company gained over three-quarters of its operating profit from memory chips.

Meanwhile, Samsung is likely to experience a boost in smartphone sales from its new flagship device, the Galaxy Note 10, which was launched in August. Samsung has outpaced U.S. rival Apple Inc. in delivering 5G-capable smartphones and recently launched the first mainstream foldable screen phone.

Samsung’s smartphone sales have also benefited from challenges faced by its Chinese rival, Huawei Technologies Co., which is grappling with U.S. restrictions that have cut off access to Google’s Android services for its mobile devices.

But some analysts remain skeptical about whether the breakneck days of growth can return, or if the pain is just easing.

“It’s too early to be talking about a recovery cycle in memory chips,” said Park Jun-hong, lead analyst for Korean companies at S&P Global Ratings.

Write to Eun-Young Jeong at [email protected]

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