On Tuesday, the South Korean tech giant said its operating profit for the last three months of 2018 fell 28.71% to about 10.8 trillion Korean won ($9.67 billion) and that fourth-quarter revenue declined 10.57% to roughly 59 trillion won. Those figures fell well short of estimates — analysts had pencilled in operating profit of 13.2 trillion won and sales of 62.8 trillion won.
Samsung blamed its weaker than expected guidance on tepid demand from memory chip customers and rising competition in the smartphone market.
Writing Was on the Wall
Investors responded to the update by sending Samsung’s shares down 1.7% in Seoul. That marginal decline after such a bruising warning suggests that the market was already preparing for the worst, even if the company’s fourth-quarter guidance took analysts by surprise.
The stock market was already aware that deteriorating relations between the U.S. and China, Samsung’s two biggest markets, would likely weigh on semiconductor demand. Then Apple hinted that the Chinese economy is in tatters, warning that consumers in the country are extremely nervy about making purchases for luxury goods such as smartphones.
Apple’s surprise cut to its sales forecast last week also had other implications. The iPhone maker is a big buyer of Samsung memory chips and smartphone screens. In fact, according to Bloomberg, Apple is the South Korean company’s biggest customer.
Mark Newman, managing director at Sanford C. Bernstein, made another interesting observation, telling CNBC that appetite for memory chips, which account for the biggest portion of Samsung’s profit, also fell “off a cliff” in the fourth-quarter because major data center companies, Amazon.com Inc. (AMZN), Microsoft Corp. (MSFT) and Alphabet Inc.’s (GOOGL) Google, are overstocked.
“Suddenly, what’s happened is data center companies such as Amazon, Microsoft, Google ... these companies suddenly have enough memory, and they stopped ordering. And that has really been one of the major stumbling blocks for these memory companies,” he said.
Looking ahead, Sanjeev Rana, a Korea technology analyst at CLSA, warned that Samsung’s troubles are likely to continue into the first quarter, reported Bloomberg.
“Recovering demand in the first quarter cannot be expected, because it is a seasonally low period and customers also know prices are coming off, so there’s no rush to buy,” said Rana. “In the second quarter Samsung launches the Galaxy S10 and a lot of other Android makers announce new model launches that might help smartphone demand and enhance the demand for DRAM.”