Samsung Suppliers Stand to Gain if the Galaxy S10 Tops a Low Bar
Samsung's (SSNLF) recently-unveiled Galaxy S10 line probably won't see blockbuster sales. But the phones -- and by proxy, the chip sales of Samsung's suppliers -- might be able to top low expectations.
Samsung's IT & Mobile Communications (IM) segment, which gets the lion's share of its sales from smartphones, saw its revenue drop 12% in dollars and 20% in Korean won in Q4. And for Q1, the consensus is for IM revenue to drop 14% in dollars to $22.6 billion. The segment's revenue is expected to rise 2% in Q2, but that's only because it was down 21% a year earlier.
With Samsung coming off a rough 2018, high-end smartphone upgrade cycles continuing to lengthen and 5G still in the early stages of rolling out, it's quite understandable that analysts don't expect the four phones in the Galaxy S10 line -- the S10e, the S10, the S10+ and the not-yet-launched S10 5G -- to collectively fare all that well. But there are a few reasons why their sales could top Wall Street's low expectations.
- Compared with the Galaxy S9 and S9+, the S10 and S10+ arguably deliver a larger set of hardware improvements relative to their predecessors. They pack larger screens and batteries, along with a triple rear camera that includes an ultra wide-angle lens. There's also an "ultrasonic" fingerprint sensor that rests under a phone's display, and the ability to wirelessly charge, and in the case of the S10+ a dual front camera.
- Reviews for the S10 and S10+ have been pretty strong -- Wired, CNET and The Wall Street Journal are among the publications that gave one or both of the phones very high marks. In addition to praising the phones' hardware, reviewers have spoken highly about Samsung's One UI software, deeming it to be cleaner and less intrusive than its traditional TouchWiz interface. Some reviewers did criticize the reliability of the new fingerprint sensor, but performance appears to have improved following the rollout of a recent software update.
- There are four phones in the S10 lineup this year rather than two, and that should help Samsung win over some phone buyers who aren't crazy about buying the S10 or S10+. The $749 S10e, which has a dual rear camera and a somewhat smaller and lower-resolution display than the standard S10, could appeal to more cost-sensitive buyers. And provided its starting price isn't too much higher than the S10+'s $999, the S10 5G, which in addition to a 5G modem packs a 6.7-inch display and 3D depth-sensing cameras that can enable AR effects and video background blur, is likely to appeal to some early adopters and gadget enthusiasts.
We probably still have to wait for 5G and foldable phones to start going mainstream before the smartphone market truly breaks out of its current funk. But that doesn't mean sales of the product that now acts as the primary computing device for a large portion of humanity are bound to fall a cliff in the interim, at least not when major phone makers have some understanding that they need to deliver meaningful hardware improvements in order to convince consumers to upgrade.
Even if one assumes that the S10 5G will be an expensive niche product, Samsung may have done enough overall with its Galaxy S10 lineup to stabilize demand for its flagship phone family. And such stabilization would be a clear positive for S10 chip suppliers such as Broadcom (AVGO) , Skyworks (SWKS) , Qorvo (QRVO) and Cirrus Logic (CRUS) .
Many of these chip suppliers, it should be noted, are still trading at pretty low forward EPS multiples amid ongoing worries about smartphone demand pressures. Their shares are likely to react well to any sign that high-end smartphone demand isn't quite as awful as feared.
Wall Street Is Paying More Attention to Enterprise Tech Valuations
March 5, 2019 | 1:13 PM ESTMore than a dozen notable enterprise tech companies have reported earnings since mid-February. And with a few exceptions, the reports have been decent.
However, only a fraction of the companies delivering good reports have rallied post-earnings. While firms such as Cisco Systems (CSCO) , Dell Technologies (DELL) , Palo Alto Networks (PANW) and VMware (VMW) have done so, the same can't be said for companies such as Workday (WDAY) , Splunk (SPLK) , Autodesk (ADSK) and most recently Salesforce.com (CRM) .
Though one can sometimes point to company-specific issues that might be weighing on the shares of the second group of firms -- Salesforce, for example, issued slightly soft April quarter guidance, albeit while issuing stronger full-year guidance -- valuations appear to be the primary reason why these companies have traded lower post-earnings, while the first group has rallied.
Even after its post-earnings selloff, Workday trades for nearly 10 times its fiscal 2020 (ends in Jan. 2020) billings consensus estimate, and 55 times its fiscal 2021 free cash flow (FCF) consensus. Splunk trades for close to eight times its fiscal 2020 billings consensus, and 39 times its fiscal 2021 FCF consensus. These estimates could very well prove conservative, given Workday and Splunk's history of guiding conservatively and subsequently beating estimates. But they do show the companies have priced in a lot of future growth.
By contrast, even after its post-earnings surge, Palo Alto Networks only trades for 5.5 times its fiscal 2020 (ends in July 2020) billings consensus, and for 18 times its fiscal 2020 FCF consensus. VMware, admittedly a somewhat slower-growing firm than Workday and Splunk, still goes for less than 20 times its fiscal 2020 FCF consensus.
And with the qualifier that it's a slower-growing company that should be trading at lower multiples, Cisco only trades for 15 times its fiscal 2020 (ends in July 2020) EPS consensus. Dell sports an even lower forward P/E, thanks in part to the $44 billion in net debt the company has on its balance sheet.
There have been some exceptions to this rule. For example, Zscaler (ZS) , which has developed a pretty innovative, cloud-based, network security platform, surged post-earnings in spite of carrying high multiples, thanks to blowout results and guidance. And on the flip side, storage hardware/software giant NetApp (NTAP) sold off post-earnings in spite of possessing low multiples, thanks to disappointing results and guidance.
But following strong two-month rallies for many fast-growing enterprise tech firms from their December lows, Wall Street has been signaling in recent weeks that it's becoming more valuation-sensitive when it comes to judging them.
Indirectly, growing trade and macro optimism might have something to do with this shift in sentiment. When markets remained very nervous about trade tensions and rate hikes, enterprise software high-flyers, many of whom have little or no Chinese exposure and could keep growing amid an economic downturn thanks to secular trends, were seen as a safe haven in a way that, say, chip stocks and Chinese tech stocks certainly weren't.
However, at a time when markets have become more optimistic that worst-case trade and macro fears won't come to pass, some investors could be more willing to put their money in relatively inexpensive tech names that had been hit hard by those fears.
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