Samsung Electronics (SSNLF) is providing yet another sign that the semiconductor and smartphone cycles eroded in recent months.
The South Korean smartphone and semiconductor king expects its first quarter profits to miss expectations, setting up the world's biggest smartphone maker for the weakest bottom line in 10 quarters.
The Seoul-based company now sees revenue of 52 trillion Korean won ($45.7 billion), down 13% from the same period last year and well shy of the previous 53.7 trillion Korean won consensus for the first quarter. Samsung also said earnings will slump to 6.2 trillion Korean won, well below the 7.2 trillion estimate, down 60% from the same period last year, and the weakest tally since late 2016.
Samsung shares closed 0.21% lower in Seoul at 46,850 Korean won each, a move that still leaves the stock with a 21.06% gain for the year.
Chinese Expansion
The company is troubled not only by well-known cyclical issues in memory and smartphone markets, but by the encroachment of Chinese competitors like Huawei , ZTE (ZTCOY) and Xiaomi (XIACF) that could be affecting results.
Recent data published by Strategy Analytics notes that major Chinese smartphone manufacturers Huawei, OPPO, and Vivo all grew their market share in the domestic Chinese market into year end 2018 and beyond. That trend could serve to accelerate as 5G phones become more prevalent given analyst reports of Huawei's strides in the new technology.
Of course, that will put pressure on Samsung and Apple (AAPL) , both of which have attempted to seize on the sizable market for Chinese consumers.
Telegraphed Tumble
Some sting was taken out of the announcement, as Apple's pre-forecast cited similar concerns on smartphones, and Samsung's own pre-earnings updates in January and March noted weakness in memory chips and panel displays. That gave investors a heads up on the memory and smartphone trough to begin the year.
"To overcome difficult business conditions, the Company will strengthen product differentiation based on its technological leadership while also enhancing cost competitiveness via efficient resource management," Samsung said in statement filed to stock exchange regulators on March 26. "In the mid to long term, we will continue efforts to strengthen key capabilities by boosting competitiveness of our major businesses while securing sustained growth via strategic investments in R&D, new businesses, etc."
The action places Samsung firmly within its peer group in both chipmaking and smartphones, both of which have forecast a strong second half rebound to buoy shareholders amidst recent hardship.
Chipmakers specifically were recent beneficiaries of a bullish forecast from Taiwan Semiconductor (TSM) that helped lead the Philadelphia Semiconductor Index (SOXX) to an all time high. The thesis for Samsung amidst the commotion follows in line with the timeline set by TSMC, Lam Research (LRCX) , and Micron (MU) in the mind of many market participants.
Essentially, the bottom may have already been built in.
Forward to 5G
Longer term, Samsung is aided by the rollout of its 5G phone offerings that became available to the public on Friday in its home market.
"We are at the beginning of a new era where the incredible speed and connectivity of 5G becomes a reality, bringing the world closer to Samsung's vision of connected living," said DJ Koh, President and CEO of IT & Mobile Communications Division, Samsung Electronics. "We are proud of the work we've accomplished to bring our first 5G smartphone to market and look forward to bringing it to everyone around the world in the coming year."
The rollout, which will be followed afterward by new foldable phones to spur demand, offers longer term investors confidence in the company's capabilities as many producers outside of South Korea lag behind.
Further, the concerns voiced widely about Huawei and ZTE should help Samsung expand into key markets unabated by their chief Chinese rivals.
The high price point of 5G enabled products and still nascent dynamics of the 5G shift make it a somewhat uncertain buying thesis for time-conscious traders, especially as it is not clear whether it will be able to offset the declines in memory market demand in the nearer term.
Nonetheless, the long-term prospects for one of the first 5G adopters are eye popping.
According to MarketsandMarkets, an Illinois-based research firm, the market could eclipse $123.7 billion by 2025 as adoption reaches more and more developed markets.
As such, it might not be surprising that many investors are willing to take the short term hit for the well-recognized first half semiconductor and smartphone slowdown.
(Lam Research and Apple are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells LRCX or AAPL? Learn more now.)
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