One of the favorite games of sell side analysts covering the smartphone/mobile device sector is “Guess That Shipment Number”; using various channel checks and supplier interviews to project shipment numbers for phones from leading manufacturers like Apple (Nasdaq:AAPL) and Samsung Electronics (Nasdaq:SSNLF) and go to the buy-side with supposedly proprietary calls. This time it's Samsung's turn, and analyst downgrades tied to flagging sales of the Galaxy S4 have sent the stock down more than 6% in South Korea.

As Samsung Electronics trades only as an unsponsored ADR in the U.S. (and an illiquid one at that), the impact to stocks like Apple, Nokia (NYSE:NOK), and the component suppliers may be the more relevant factor to consider. While it would be very hasty to call these lower shipments (if the stories are true) the end of Samsung's smartphone boom, it's a good reminder that over-booking and product launch cycles introduce a lot of uncertainty into this sector.

Discount Brokers Comparison: Your one-stop shop for finding the perfect broker for your investments.

A Big Downward Revision In Expectations
While there were multiple analyst downgrades of Samsung tied to lower shipment expectations, a JPMorgan report has garnered the most attention. Analyst JJ Park has cut S4 shipment expectations by 25% for the year, with shipments of the older GS3 declining by half in the second quarter.

Park has cited multiple factors in these revisions, including both increasing competition from lower-priced, lower-featured phones and Samsung's own decision to overbook so as to ensure adequate supplies of critical components. It's also worth noting that demand appears to be weaker in the EU and South Korea, while U.S. demand has remained fairly good.

SEE: A Primer On Investing In The Tech Industry

If It Rolls Downhill, Who Gets Caught Up In It?
If these lower shipments do materialize, a host of well-known components companies could see some pressure to numbers and analyst expectations.

Universal Display (Nasdaq:PANL) produces OLED panels for the GS4, as it has for prior versions of the Galaxy family. With Samsung (Samsung Display, to be exact) making up about two-thirds of Universal Display sales in the last fiscal year, I'd argue that any noise or worry about Samsung shipment levels could have a disproportionate impact to expectations.

The Samsung GS4 also uses components from Qualcomm (Nasdaq:QCOM), Broadcom (Nasdaq:BRCM), and Skyworks (Nasdaq:SWKS). For Qualcomm, it's hard to get too worked up about any one particular model or product cycle, as the company's overall share in areas like baseband and strong licensing revenue streams make it more of a general play on smartphone demand.

Investors have previously worried about Samsung designing Broadcom out of future phones, and the company has a good mix of vendor and model exposures, including many other Samsung models as well as devices from Google (Nasdaq:GOOG), Apple, and other vendors in South Korea and China. Even so, such a significant reduction in S4 orders/shipments could make it harder for Broadcom to deliver earnings upside in the near future.

Skyworks generated about 17% of its revenue from Samsung in its fiscal year ending in September 2012, but Skyworks also has meaningful exposure to Apple and the shares have been pretty weak for the past nine months.

SEE: Earning Forcasts: A Primer

Predictable Unpredictability Is The New Norm
Investors have already been digesting the likelihood of weakening high-end smartphones for a little while now, so while there could be some company-specific turbulence in the wake of these Samsung downgrades, I don't think this is really a stunning development.

What it does suggest, though, is that the business of supplying phone designers has gotten more challenging and less predictable. Designers are more willing to over-commit to higher shipment levels to ensure that they have the components they need to support successful launches and then cut those orders back sharply to better fit the subsequent demands. It's also true that particular product cycles move stocks more than in the past, as “who's in/who's out” decisions shift sentiment as companies book the revenue and profits of the last cycle.

I'm still generally bullish on the major players like Broadcom and Qualcomm, though the discounts to fair value do seem to reflect Wall Street's greater unease with the cycle-to-cycle volatility and potential for slowing high-end demand. At the same time, if Samsung is in fact losing share in Asia, particularly in lower-feature phones, investors may want to check out Lenovo (Nasdaq:LNVGY) as a potential share gainer in the region.

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.

Related Articles
  1. Investing Basics

    Does Active Value Investing Pay Off?

    Learn about a recently published paper that explores why active value investors underperform.
  2. Investing Basics

    Equity Investing For The Buy-And-Holder

    The buy-and-hold investment strategy requires investors to disregard their emotional responses to market movements.
  3. Mutual Funds & ETFs

    All Weather Investing With ETFs

    All Weather investment strategies can shield investors during the worst bear markets.
  4. Investing

    Build a Retirement Portfolio for a Different World

    When it comes to retirement rules of thumb, the financial industry is experiencing new guidelines and the new rules for navigating retirement.
  5. Investing

    Redefining the Stop-Loss

    Using Stop-losses for trading doesn’t mean ‘losing money’, but instead think about the money you'll start saving once you learn how they work.
  6. Fundamental Analysis

    10 Major Companies Tied to the Apple Supply Chain

    Apple has one of the best supply-chain models. Here are some of the top businesses involved, and the benefits and challenges for all.
  7. Term

    Why You Should Consider Investing In the Tech Industry

    The technology industry offers huge investment opportunities.
  8. Term

    What are Non-GAAP Earnings?

    Non-GAAP earnings are a company’s earnings that are not reported according to Generally Accepted Accounting Principles.
  9. Investing

    The Unintended Consequences of Self-Driving Cars

    An overview of some unintended consequences of the driverless car revolution.
  10. Mutual Funds & ETFs

    ETF Analysis: PowerShares FTSE RAFI US 1000

    Find out about the PowerShares FTSE RAFI U.S. 1000 ETF, and explore detailed analysis of the fund that invests in undervalued stocks.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
  4. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
  5. Middle Market

    Definition of middle market
  6. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  3. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  4. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  5. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  6. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!