Samsung Electronics Co Ltd.’s (SSNLF) shares fell as much as 5 percent after a Wall Street brokerage warned that the South Korea-based technology giant's profits are set to be squeezed by cheaper prices for its popular memory chips.
In a research note published on Sunday, Morgan Stanley slashed its price target on Samsung’s stock by 3.4 percent to 2.8 million won and downgraded its recommendation from “overweight” to “equal weight." The firm’s Shawn Kim took a more bearish stance after concluding that earnings in the company’s memory segment are set to fall after an impressive run.
Robust demand for more firepower in servers and smartphones previously pushed memory chip prices higher, helping Samsung to register record third-quarter profit of 14.5 trillion won ($12.91 billion) in October. However, Kim noted that appetite for the company’s NAND and DRAM memory chips has since started to waver.
"We see downside risk as NAND prices have started to reverse in the fourth quarter,” said Kim. “Meanwhile, visibility on DRAM supply-demand dynamics has reduced beyond the first quarter 2018." (See also: iPhone X Will Help Apple Beat Samsung in Q4: Report.)
Samsung previously warned investors that appetite for its NAND and DRAM memory chips would likely be affected by supply-demand dynamics in the new year. As a result, some analysts questioned the market reaction to Morgan Stanley’s research note. “The reaction is a bit over-sensitive, as all this was known,” said Greg Roh, analyst at HMC Investment & Securities, according to Reuters.
Analysts also pointed out that falling prices are likely to impact other companies more than Samsung, including SK Hynix Inc. the world’s second-largest maker of memory chips. “We all knew that NAND prices are going down, which is actually needed to encourage sound demand and increase shipments,” added Roh. “And Samsung is strong in NAND chips for data center SSDs (solid state drives) which will be less affected.”
Shares of SK Hynix fell as much as 3.6 percent, following the release of Morgan Stanley’s note. (See also: Why Samsung's Stock Will Outshine Apple.)