UPDATED 21:32 EDT / JANUARY 07 2019

INFRA

First Apple, now Samsung says it’s expecting a massive drop in profit

Samsung Electronics Co. Ltd. has added to the doom and gloom surrounding technology stock markets after posting preliminary fourth-quarter earnings today that came in way below expectations.

The culprit, according to Samsung, is a drop in demand for its memory chips and strong competition in smartphones. The company said it’s expecting an operating profit for the quarter of about 10.8 trillion won ($9.67 billion), down 38.5 percent from the previous three-month period, and far below the 13.2 trillion won predicted by market analysts.

Samsung also said its consolidated fourth quarter sales will amount to around 59 trillion won, down 10 percent from the previous quarter and lower than the 62.8 million forecast by analysts.

The reason for the shortfall is weaker-than-expected demand for its memory chips, which led to a decline in shipments. The memory chip business was also hit by a drop in prices, the company said. The drop in demand was partly the result of ongoing tensions between China and the United States, Samsung’s two biggest markets.

The company fared little better with its smartphone business, which is a stagnant market that saw profitability decline because of marketing expenses. The company didn’t provide exact numbers, but in the third quarter of 2018, it saw a 13 percent year-over-year decline in its smartphone shipments, according to data from International Data Corp.

Samsung will officially publish its detailed earnings report later in January, but the preliminary forecast was already enough to spook investors. The company’s share price fell about 2 percent in early trading in Seoul Tuesday.

Things could get even worse for Samsung in the coming months too, as the company warned that it expects “difficult business conditions” in its memory business to continue throughout the first quarter of 2019. The memory business is vitally important to Samsung because it dominates the market for Dynamic Random-Access Memory components with a 45 percent share. In the previous year, sales of DRAM and other memory components went through the roof, resulting in record-breaking profits for Samsung.

However, Japanese analyst firm Nomura told the Nikkei Asian Review that this year could be a different story. It expects DRAM prices to decline by as much as 31 percent this year, while prices for NAND flash could fall by up to 44 percent. As a result, Nomura said, Samsung’s memory business could see its operating profit fall by 45 percent in the next quarter.

Still, Samsung did say it expects profitability to recover in the second half of 2019 thanks to projected improvements in memory market driven by sales of new processors and launches of new smartphone products.

Samsung’s bad news follows a warning from Apple Inc. last week, which drastically slashed its revenue forecast for the fourth quarter, blaming lower-than-expected revenue in China. That news tanked the entire stock market for a day.

“Something isn’t working for the western world market leaders in smartphones at the moment,” said Holger Mueller, principal analyst and vice president at Constellation Research Inc. “Misjudging the performance to price ratio in China has not helped either Samsung or Apple, and both are now shrinking in market share, while their Chinese competitors are growing.”

Going forward, Mueller said he was optimistic that Samsung could turn around its smartphone business again, but said the company would first need to stop borrowing from Apple’s playbook and get its priorities right.

“Samsung tried to model itself after Apple on the high end, but this strategy is now hurting the company in China and beyond,” Mueller said. “Only when Samsung gets its R&D innovation vs price balance right will it be able to get on the growth path again.”

Photo: DennisM2/Flickr

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