Are Markets Pricing in Hard Landing for Smartphones?
After the multi-month rout in Apple shares, rival consumer electronics giant Samsung Electronics' stock fell victim to heavy selling on Friday that wiped out $12 billion of the company's market value on concerns smartphone sales may underperform market expectations.
Is the share price performance of the world's leading smartphone makers a warning of the dire future for the industry's profitability?
"We believe Samsung's current share price reflects a hard landing of the smartphone business in the near future, which we think is highly unlikely," CW Chung, an analyst at Nomura wrote.
Seoul-listed Samsung shares extended losses on Monday, edging down 0.1 percent to 1.42 million won ($1,260), on top of the 6.2 percent plunge last Friday.
Shares on rival Apple have fallen almost 34 percent since last September, driven by worries over the company's earnings outlook, supply chain constraints and pace of innovation.
Concerns over slowing sales momentum for Samsung's latest Galaxy S4 smartphone, alongside thinner margins for the device compared to its predecessor the Galaxy S3 - as a result of higher production and marketing costs - are two factors weighing on investors' minds.
The U.S. investment bank JPMorgan last week said orders for the new phone are slowing on weak demand out of Europe, lowering its expectations for Galaxy S4 shipments to 60 million this year, from a previous estimate of 80 million. The bank also cut its 12-month price target for the company by 9.5 percent to 1.9 million won from 2.1 million.
According to Sundeep Bajikar, equity analyst at Jeffries concerns over the lower shipment forecasts are "overdone".
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"Our analysis points to [consumer] upgrades from iPhones to Galaxy phones at the high end as a key driver of continued share gains," Bajikar said. His 12-month price target for the stock is 2.1 million won.
"Our checks at large operators in China indicate acceleration in S4 sales, and deceleration in iPhone 5 sales. Our anecdotal checks at Best Buy stores suggest that a similar phenomenon might be occurring in the U.S.," he said, adding that upcoming launches of the S4 mini and Windows 8 phone later in the year will also help extend Samsung's product lead over Apple.
In the first quarter, Samsung seized more smartphone global market share from Apple, rising to 32.7 percent, from 28.8 percent a year earlier, according to research firm IDC. Apple's market share, by contrast fell to 17.3 percent from 23 percent from year ago levels.
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On declining smartphone profitably, Chung says the market is pricing in a bigger decline in profit margins than he believes will actually materialize. Smartphone profitability is especially significant for Samsung because they account for around 60 percent of the company's profits.
Samsung's current stock value is pricing in a 3 percent decline in smartphone profit margins in 2014, said Chung, but he believes it will be less, at 2.7 percent.
While Chung downgraded his 12-month price target on the stock to 2.2 million won from 2.3 million on Friday, he maintains a buy recommendation on the stock. His price target marks 92 percent upside from current levels.
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"We believe the earnings recovery for semiconductor and display businesses are still intact and maintain our view that Samsung's earnings will be more geared towards component business going forward," he added.
By CNBC's Ansuya Harjani