Tech

Samsung predicts fourth-quarter decline in profits due to weak demand and growing competition

Key Points
  • Samsung Electronics on Thursday said it expects a decline in profit in the three months that will end on Dec. 31 due to weak memory chip demand and intense competition in the smartphone and consumer electronics spaces.
  • Samsung announced a 59% year-on-year jump in operating profit to 12.35 trillion Korean won (about $10.89 billion) for the July-September quarter, which was in line with earlier guidance.
A South Korean flag, left, and Samsung Electronics flag fly outside the company's headquarters in Seoul, South Korea, on July 5, 2019.
Jean Chung | Bloomberg | Getty Images

SINGAPORE — Samsung Electronics on Thursday said it expects a decline in profit in the three months that will end on Dec. 31 due to weak memory chip demand and intense competition in the smartphone and consumer electronics.

The world's top smartphone maker announced a 59% year-on-year jump in operating profit to 12.35 trillion Korean won (about $10.89 billion) for the July-September quarter, which was in line with earlier guidance. Samsung said it was partly due to a boost in demand for smartphones and consumer electronics — sale of smartphones, including new flagship models like the Galaxy Note20, saw a near 50% jump in sales.

Samsung shares closed down 1.53% Thursday, tracking the overall decline in the South Korean market where the Kospi index fell 0.79%, likely due to a sharp sell-off on Wall Street a day earlier.

"Looking ahead, Samsung Electronics expects profit to decline in the fourth quarter amid weakening memory chip demand from server customers and intensifying competition in mobile phones and consumer electronics," the company said in a statement.

Samsung remains a 'Buy' (rating) for the simple reason that next year we expect profit growth of 30%.
Sanjeev Rana
CLSA

Low prices for memory chips used by servers in data centers are likely to weigh on the main profit-making semiconductor business in the last three months of 2020. Demand for chips used in smartphones, personal computers and graphics processing units, used for gaming consoles and PCs, is predicted to rise, Samsung said.

The mobile business will potentially see smartphone sales decline, according to the South Korean tech giant.

Analysts say that's likely due to increased competition as the new Apple iPhone 12 and iPhone 12 Pro are set to take some market share away from the South Korean smartphone maker in the fourth quarter. But Samsung's displays unit, which counts Apple as a customer, is set to see a significant rise in mobile panel sales from the third quarter due to new smartphone launches, according to the South Korean tech giant.

Sanjeev Rana, a senior analyst at brokerage firm CLSA, said he remained bullish about Samsung's performance in 2021.

"Samsung remains a 'Buy' (rating) for the simple reason that next year we expect profit growth of 30%. This will be on the back of 43% recovery in semiconductor profit," Rana told CNBC's "Squawk Box Asia" on Thursday after the earnings announcement.

He said that an ongoing decline in average selling prices for memory chips will bottom out in the first three months of 2021 and prices will rise in subsequent quarters. Samsung's smartphone business is also expected to do well because of an increase in online sales, which involves lower marketing cost for the company, Rana said.

"Next year, we think will be good for the Samsung foldable phones too," he added.

For next year, Samsung predicted a recovery in overall global demand but said uncertainties will remain over the coronavirus pandemic.