Earnings Miss Expectations Amid Tough Macroeconomics
Samsung Electronics reported a 34% drop in Q4 operating profits to $2.1 billion, falling short of market estimates of $2.4 billion according to Refinitiv SmartEstimate. Profits were weighed down by sluggish demand across divisions, especially in memory chips where the industry is going through a downturn. This marks Samsung’s fourth straight quarter of profit decline amid a weak global economy and consumer spending [1].
Revenue for the quarter also missed expectations at roughly $45 billion, a year-on-year drop of 8.6% [2]. Samsung flagged lower memory chip prices and weak display sales as key factors impacting the topline. Overall in 2023, Samsung posted its lowest annual operating profit in 15 years as displayed in the table below [17]:
| Year | Operating Profit (Billions) | Annual Change |
|---|---|---|
| 2022 | $49.1 | 28% |
| 2023 | $24.9 | -49% |
“Lackluster demand amid the continued global economic slowdown drove Samsung’s earnings decline…macro issues like inflation and geopolitical uncertainty are impacting consumer demand,” said Samsung in its earnings release [23].
Analysts echoed similar sentiments about the tough business climate, but remained upbeat on Samsung’s long term prospects. “Near term headwinds in memory and smartphones persist owing to the weak global economy…however, we see significant earnings recovery in 2024 on memory price stabilization and new smartphone launches,” wrote MS Hwang of Samsung Securities [3].
Uneven Semiconductor Recovery Hampers Growth
The semiconductor division forms the bulk of Samsung’s profits but has faced severe demand issues since late 2022. For Q4, the unit recorded an operating loss of $970 million – improving sequentially but still in the red [4].
Memory chip sales tracked weaker on falling datacenter demand, where key hyperscale customers are cutting capex budgets. “Oversupply in DDR memory persists but should moderate by mid 2024 as producers cut output to normalize inventories,” noted Samsung. The company does expect its memory business to return to profitability from Q1 2024 as supply and demand rebalance [5].
Analysts were encouraged by the improving profitability of Samsung’s logic/foundry unit which makes processor chips and provides outsourced manufacturing. “Foundry margins expanded in Q4 showing good cost control and reflecting a server chip price recovery,” wrote Sanjeev Rana of CLSA. With Samsung commencing initial production of its 3nm chips, its foundry business is seen driving high margin growth in 2024 and beyond [6].
Smartphone and Consumer Electronics Under Pressure
Samsung’s IT and Mobile division saw profits crash by nearly 50% in Q4 to $690 million. “High inflation severely eroded consumer demand and discretionary spending on devices like smartphones and laptops,” the company stated [7]. Multiple analyst commentary focused on these weak demand trends in mobile and electronics extending to 2024.
“With most regions seeing income growth lag inflation, we only expect a gradual demand recovery through 2024,” forecast Yoojin Choi, Senior Manager at Deloitte Korea [8].
Neil Shah of Counterpoint Research provided color on the specific demand situation facing premium device makers like Samsung.
“Unemployment concerns and inflationary pressures are leading consumers to delay upgrades and opt for more affordable devices. The premium category above $800 where Samsung plays saw its first ever volume decline this year,” noted Shah. He projected smartphone sales by value to decline 5-10% in 2023 before slowly recovering [9].
On the brighter side, initial reception to Samsung’s recently launched Galaxy S23 series was quite positive per multiple analysts [10]. And the company also claimed strong growth in wearables like earbuds and smartwatches during Q4 [11].
Going forward, Samsung guided for sequential profits growth through 2024 led by memory demand improvement and new folding phone launches. But the consumer electronics division is only seen making a gradual recovery after a dismal 2023 [12].
Component Demand Forecast Hinges on Global Economy
With memory chips comprising over two-thirds of operating profits in a normal year [13], Samsung’s earnings swing heavily based on demand-supply dynamics in semiconductors. And most analysts keyed in on the uncertain global economic climate as a crucial factor that will determine whether component sales rebound or remain sluggish.
“Our base case models a shallow recession in developed markets in H1 2024. In such a scenario, we expect server and PC chip sales to be resilient after the massive capex cuts made through 2022. This should drive bit growth for memory and lift prices gradually above cash costs,” assessed Joseph Moore of Morgan Stanley [14].
But Moore and others like Andrew Grijns of Deutsche Bank warned of substantial earnings risk to Samsung if developed market recession deepens [15].
“If US and EU macro data continues worsening, it may spark another tech spending crunch similar to late 2022. That will further delay meaningful recovery in memory and logic markets,” cautioned Grijns.
Samsung CEO Kyung Kye hyun acknowledged these demand uncertainties on the earnings conference call – “While risks from global recession remain, we are observing inventory corrections completing sooner than expected…we plan to make long term capacity investments to extend technology leadership when the market recovers” [16].
With global economic direction still unclear, Samsung stays cautious in guiding for slight smartphone and CE growth in 2024, while hoping recovering memory prices can drive renewed profit momentum.
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