Samsung Electronics, the world’s largest memory chip and smartphone maker, has reported a substantial 35% drop in operating profit for the fourth quarter of 2023. This marks the tech giant’s sixth consecutive quarter of profit declines, as a severe downturn in the semiconductor industry continues to hamper earnings.
Prolonged Demand Shocks Drive Steep Profit Declines
On Monday, Samsung forecast its October-December operating profit to come in at around 4.3 trillion won ($3.4 billion), representing a steep tumble from the 6.6 trillion won earned in the same period a year earlier [1]. The sharp profit contraction, Samsung’s largest percentage drop since Q3 2019, fell significantly short of analysts’ consensus estimate of around 5.8 trillion won [2].
The dismal Q4 earnings cap off Samsung’s most difficult year since 2015, with full-year operating profit plunging nearly 40%. The prolonged demand shocks across various technology segments have severely eroded margins and earnings over the past year [3].
| Key Figures | Q4 2023 (Estimate) | Q4 2022 | Change |
|---|---|---|---|
| Operating Profit | $3.4 billion | $5.2 billion | -35% |
| Revenue | $45.2 billion | $63.5 billion | -29% |
| Semiconductor Profit | $0.8 billion | $3.8 billion | -79% |
The driving factor behind Samsung’s declining profitability has been the semiconductor industry’s sudden shift from boom to bust. Just last year, surging demand for memory chips during pandemic lockdowns had lifted Samsung to record revenue and earnings. However, inventory corrections and falling consumer electronics demand in 2023 have ravaged chip prices and earnings [4]. Samsung’s semiconductor division, which supplies both memory and processor chips, is expecting operating profits to plunge a disastrous 79% year-over-year.
Mixed Outlook Amid Early Signs of Recovery
Despite the gloomy headlines, Samsung offered a cautiously optimistic outlook for 2024. The company stated that memory chip prices appeared to have bottomed out in Q4, noting recent spot price increases for both DRAM and NAND flash storage chips. With chip buyers appearing more willing to stock up on memory at lower prices, industry watchers suggest inventory corrections may have largely run their course [5].
Samsung itself noted that “memory chip demand is expected to recover as datacenter customers replenish inventory,” likely during the first half of 2024 [6]. However, CEO Han Jong-hee warned that macroeconomic uncertainty persists, and near-term visibility remains low.
On the smartphone front, Samsung expects weaker profitability from its Mobile eXperience (MX) division after a strong 2022. With the global smartphone market contracting by nearly 10% this year, competition has intensified and average sales prices have softened for high-end devices like the Galaxy S23 series [7]. Nevertheless, Samsung maintained its leading industry position with a 21% worldwide smartphone market share.
Looking ahead, Samsung aims to buttress profits through stringent cost control efforts and increased production of higher-margin products like extreme ultraviolet (EUV) processor chips. The company also aims to capitalize on emergent trends like automotive electronics and wider 5G implementation.
Share Price Dips After News of Weaker Guidance
Investors initially shrugged off the gloomy earnings guidance on Monday morning, with Samsung Electronics shares rising over 1% in early trading on the Korea Exchange [8]. However, the stock reversed course shortly after the market open and declined 1.7% from the previous close.
The lackluster market reaction reflects nuanced investor thinking around Samsung’s future prospects. While Q4 operating profits badly lagged consensus estimates, analysts noted the severity of the shortfall had been gradually telegraphed by management over recent months. Chip prices also appear to be stabilizing, and smartphone demand remains resilient enough to keep Samsung profitable despite broader industry weakness.
Nevertheless, downside risks abound in 2024 for the technology bellwether. The possibility of a global recession later this year could squelch the nascent memory chip recovery, while margin pressure seems unavoidable if smartphone competition continues heating up.
With so much uncertainty as well as glimmers of hope on the horizon, expect Samsung’s volatile share price gyrations to continue over the coming quarters. For long-term investors though, the tech giant remains well positioned to capitalize on several potent tech megatrends this decade.
References
- https://www.bloomberg.com/news/articles/2024-01-08/samsung-profit-tumbles-35-as-chip-weakness-persists
- https://www.reuters.com/technology/samsung-elec-flags-35-drop-q4-profit-missing-market-consensus-2024-01-08/
- https://www.cnbc.com/2024/01/09/samsung-issues-guidance-for-q4-2023-expects-35percent-profit-drop.html
- https://www.scmp.com/tech/big-tech/article/3247610/samsung-set-smallest-profit-drop-6-quarters-chip-rebound
- https://www.zdnet.com/google-amp/article/samsung-narrows-profit-drop-in-q4-as-chip-demand-begins-rebound/
- https://news.samsung.com/global/samsung-electronics-announces-earnings-guidance-for-fourth-quarter-2023
- https://www.counterpointresearch.com/global-smartphone-share/
- https://pulsenews.co.kr/view.php?year=2024&no=19459
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