As Samsung begins to lose its grip on the smartphone market, the South Korean technology giant appears to be losing its shine for investors, with one long-time bull slashing his price target on its stock.
Mark Newman, senior analyst at Sanford Bernstein on Tuesday cut his 12-month price target on Samsung to 1.65 million won from 2 million won, citing a greater-than-expected loss of market share to Chinese smartphone brands and lower margins.
"Despite valuation, shares lack a catalyst in the near term and we expect them to remain range bound. Upside is significant but not likely to come before we see clarity around cash returns or stability of handset margins," Newman wrote in a note titled 'Samsung Electronics: Commoditize or Be Commoditized?'
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Newman anticipates Samsung's smartphone margins will come under pressure as it gets more aggressive on pricing in the low-end to prevent market share loss and hold back Chinese manufacturers, which have become emboldened by the recent lack of competition from advanced players in the sub-$200 smartphone market.
"Protecting margins in the low-end is fruitless as it just hands share to Chinese competitors and eventually drives margins down anyway due to less scale advantage. Samsung must react now before it is too late," he said.
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Newman forecasts Samsung's operating profit margins for its smartphone business to decline to 15.5 percent from 23.3 percent from 2013 to 2015. He expects handsets will make up just 47 percent of company profits in 2015 down from 67 percent in 2013.
In the second-quarter, Xiaomi, China's homegrown handset maker referred to as 'China's Apple', overtook Samsung to become the top smartphone vendor in the country, according to research group Canalys.
Bumper sales of its low-cost RedMi range, Xiaomi saw its second-quarter sales in China explode by 240 percent from a year earlier, taking a 14 percent share in the world's largest smartphone market, up from 10.7 percent in the previous three months.
Meanwhile, Samsung, which reported a bigger-than-expected fall in second quarter profit in the April-June period, saw its share in the mainland market decline to 12 percent from 18.3 percent.
Ratings agency Fitch Ratings warned on Tuesday that pressure on market share is likely to continue. It forecasts Samsung's global smartphone shipment market share will decline to around 25 percent by 2015 from 31 percent in 2013 in the face of rising competition in from low-end handset manufactures in emerging markets. It also predicted a loss of market share for rival Apple to 14 percent from 15 percent.
However, Newman, who continues to hold an overweight rating on the stock, is hopeful that Samsung will successfully use its substantial scale compared with Chinese competitors to gain share back in the low-end.
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Other reasons for his long-term optimism around the stock's outlook include strength in the company's memory business and the prospect of greater shareholder returns.
"Samsung's cash pile has increased sharply recently and shareholder returns at Samsung have plummeted over the past decade," Newman said.
"In light of recent comments by Samsung, while the announcement of significantly increased shareholder returns is still on the table, it will probably have to wait until the end of 2014/early 2015 given all the moving factors that will affect Samsung's final decision," he said.
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Newman's price target of 1.65 million won - which is also the median price target on the stock, according to Reuters' poll of equity research analysts – marks 30 percent upside from current levels.
Samsung's stock, which has declined 6.8 percent this year, last traded at 1.28 million won.
According to Reuters, 11 equities research analysts have rated the stock with a 'strong buy' rating, 31 have given a 'buy' rating, 7 have assigned a' hold' rating and two have recommended a 'sell' rating on the stock.
Nam Hyung Kim, a partner at Arete Research, who has a 12-month price target of 1.7 million won for the stock, says concerns around Samsung's declining market share in emerging markets are largely priced into the share price.
"I see limited downside from current [levels] as the stock is still very cheap," he said.
Echoing Newman's view on the next big catalyst for the company's stock, Kim said, "I believe Samsung's share price will be volatile without much movement until Samsung's group ownership change is completed [after which] the company is expected to increase capital return to investors, which will be a positive signal."