Samsung's Rally Can't Keep Living on Memories
Even memories can’t last forever—as investors in Samsung Electronics should know.
Doubts about the Korean technology giant’s near-term prospects rose last week after analysts at Morgan Stanley pointed to some issues that might crimp its growth. Since then, Samsung’s shares have dropped 8.5%.
The company, the world’s largest maker of memory chips, is still enjoying strong demand from data centers as companies use ever more cloud services: Its profits and share price have both doubled in the past two years. But skepticism that Samsung can continue to forge ahead so quickly are justified, given the sector’s weakening fundamentals.
The situation looks particularly bad in one type of memory chip called NAND, which is used for storage. Samsung has been a leader in using a technology called 3D-NAND, which stacks chips over each other to increase their capacity, but others like Korea’s SK Hynix and Micron in the U.S. are catching up. As manufacturers pack more storage capacity into a single chip, global memory supply, in terms of gigabytes per wafer, could grow by 45% next year, outpacing demand growth, analysts at Bernstein reckon. In turn, NAND prices, which are up 41% this year, could start falling next quarter, causing profits across the NAND-producing industry to dip by 3% next year.
The good news for Samsung is that it still enjoys lower costs and a bigger market share than its rivals, due to its technological edge. Still, its profits seem unlikely to keep growing at their current pace given the backdrop. Samsung could also be buoyed by the continued strong sales of another type of memory chip called DRAM used in computer processing, which will likely contribute over 42% of its operating profit this year, according to Morgan Stanley. The market there is more consolidated with three dominant companies: Samsung itself accounts for half of global production, meaning it can be more disciplined on supply growth.
Samsung’s enterprise value now stands at 4.2 times its earnings before interest, taxes, depreciation and amortization. It is still cheap, compared with global peers like Micron, but above its five-year average of 3.5 times, according to S&P Global Market Intelligence. New demand for chips from artificial intelligence and cloud computing may mean memory chip cycles are less pronounced than before. This means Samsung’s shares may not fall back to their 2015 level soon, but repeating their rally this year will be a struggle.
Write to Jacky Wong at JACKY.WONG@wsj.com