Samsung Growth Slows on Weak Phone Sales

Samsung growth is seen sluggish as weak phone sales weigh down.

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Samsung Electronics Co Ltd, South Korean technology giant, estimated on Friday that its earnings swelled at the slowest pace in over a year during the second quarter, with analyst saying that weak smartphone sales probably offset record high chip earnings.

Samsung shares dropped 2 percent as the guidance gave investors some insight into how badly the slump in smartphone earnings is damaging the company’s bottom line. This came after it warned in April of a slowdown in its earnings amid the tougher competition.

Samsung, which is world’s biggest manufacturer of memory chips, smartphones, and TVs, stated that April to June operating profit would increase 5.2 percent to 14.8 trillion Korean won ($13.2 billion). This is just below the average estimate of 14.9 trillion won from 18 analysts surveyed by a news agency.

According to analysts,  even if the chip business would record its seventh record quarterly profit in a row, lackluster smartphone earnings growth sparked concerns that the mobile business is running out of fuel to underpin the sales of its premium Galaxy devices.

“It’s going to be tough. The smartphone market is not growing anymore but the competition is intensifying,” said Won-sik, who is an analyst at Shinyoung Securities.

Samsung shares were down around 12 percent this year on worries over sluggish profit growth plus a lack of technological innovation to drive smartphone sales.

On Thursday, the newly-released monthly data by mobile phone market tracker Counterpoint Research highlighted Samsung’s problems. The data showed that the company’s latest Galaxy 9 Plus premium handset had been beaten by Apple Inc’s iPhone 8 as the world’s top-selling smartphone, largely due to the weak sales in Europe,

The competition from less expensive Chinese brands like Xiaomi Corp and Huawei have already resulted to Samsung losing some market share in China and India, which are the world’s top smartphone markets.

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Meanwhile, even as its smartphone business is currently turbulent, the primary growth drivers for Samsung are strong global sales of the DRAM and NAND chips. Such chips account for roughly a third of the company’s revenue.

Overall sales probably dropped 4.9 percent from a year earlier to 58 trillion won, Samsung stated, compared with analysts’ average estimate of 59.7 trillion won. The company did not disclose details and will release detailed earnings in the latter part of July.

The outlook for the chips is still positive, as the production of Apple’s next iPhone will likely support NAND flash memory prices after they declined by as much as 15 percent in the second quarter, as per chip price tracker DRAMeXchange.

The average selling price of DRAM chips, which make it easier for devices to perform multiple tasks, is predicted to climb 14.8 percent this year, according to Gartner, a research firm.

“Overall, third-quarter profit will be stronger than the second quarter as Samsung will perform better in the semiconductor and display businesses,” stated Song Myung-sup, who is an analyst at HI Investment & Securities.

On the other hand, investors are becoming more and more concerned about the full-blown trade war between China and the United States. Market participants are also jittery over the potential effects of the war to major exporters like South Korea’s tech champions.

“Sentiment is absolutely not positive as South Korea heavily relies on exports, but we should see if that really hurts financially key exporters like Samsung,” stated Park Jung-hoon, who is a fund manager at HDC Asset Management that owns Samsung shares.

Fears over a Chinese price-fixing investigation also loom large among investors. The probe could potentially limit the upside for DRAM prices, with China as the biggest importer of memory products.

The high cost of chips has frustrated electronic makers, as Chinese manufacturers stay among the hardest hit as they operate at lower margins than competitors.

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