Smartphones don't drive Samsung's stock price — but here's the outlook for products that do

Published Wed, Jan 13 20214:05 AM ESTUpdated Wed, Jan 13 20215:02 AM EST

Key Points

Samsung Electronics is set to launch its latest flagship Galaxy smartphones on Thursday, earlier than expected.
But phones aren't the reason analysts are bullish on the stock.

Samsung Electronics is set to launch its latest flagship Galaxy smartphones on Thursday, earlier than expected . But that's not why analysts are bullish on the stock. Unlike 7 or 8 years ago, Samsung's market performance today is driven mostly by its semiconductor unit, analysts say. And they like the way it looks in 2021. "Samsung stock is now more correlated to the outlook of its semiconductor business, which we expect to account for 61% of its operating profit, compared to smartphone related business, which is expected to account for only 24% of its operating profit this year," said Sanjeev Rana, an analyst at CLSA. Global smartphone demand has been falling for four years and the sale of pricey, high-end phone models have been under pressure. But Samsung's semiconductor business unit, which includes chip manufacturing, sells NAND and DRAM memory chips used in laptops, smartphones and data centers. Bullish outlook Analysts have either raised or maintained their price targets on Samsung in recent months. Shares of Samsung Electronics closed at 89,700 won on Wednesday and were up about 50% from a year ago, outperforming the benchmark Kospi index in the same period. Nomura maintained a "buy" rating on the stock in its Jan. 8 note, and a target price of 97,000 Korean won ($88.62) a share, which is about 8% higher than Samsung's closing price on Wednesday. Daiwa Capital Markets in a Dec. 24 note said it was raising its price target from 90,000 to 115,000 won while maintaining a "buy" rating. Its analysts said substantial earnings generated over 2021-2022 and other shareholder returns, including cash dividend and share buybacks, will drive up the stock price. CLSA's Rana told CNBC his price target is 110,000 won. "Improving visibility around Samsung's new growth drivers such as foundry, image sensors, application processors and automotive chips and its declining dependence on the cyclical memory business in the mid-long term strengthens our conviction on the stock's valuation re-rating prospects," he said. Earnings prediction Low memory chip prices weighed on Samsung's earnings last year, but analysts broadly expect market conditions to improve in 2021, along with the company's profits. "We believe that strong earnings improvement will continue in 2021-22F thanks to the memory and foundry super-cycles," Nomura analysts CW Chung and Jung Cho said. In its latest guidance , Samsung said operating profit for the three months between October to December likely rose 26% annually to 9 trillion Korean won ($8.22 billion). Rana from CLSA has projected a 46% growth in operating profit for 2021 on the back of higher average selling prices for DRAM memory chips and margin improvement for the non-memory semiconductor business. He predicts a 69% year-on-year jump in Samsung's semiconductor profits to 32.2 trillion won this year and expects profit margin for other business units to get better.

A woman walks past the logo of Samsung Electronics at the company's Seocho building in Seoul on January 30, 2020.

Jung Yeon-je | AFP via Getty Images

Samsung Electronics is set to launch its latest flagship Galaxy smartphones on Thursday, earlier than expected.

But that's not why analysts are bullish on the stock. Unlike 7 or 8 years ago, Samsung's market performance today is driven mostly by its semiconductor unit, analysts say. And they like the way it looks in 2021.

"Samsung stock is now more correlated to the outlook of its semiconductor business, which we expect to account for 61% of its operating profit, compared to smartphone related business, which is expected to account for only 24% of its operating profit this year," said Sanjeev Rana, an analyst at CLSA.