Samsung’s Non-Surprise Has a Positive Flip Side

(Bloomberg Opinion) -- Samsung Electronics Co. just posted revenue that missed analyst estimates.

That shouldn’t be a surprise. This is the third straight quarter that it missed the mark at the top line. Operating profit also came in below expectations.

Analysts have been progressively lowering their second-quarter figures since the end of October, when the South Korean electronics giant detailed earnings for the third quarter of 2017. Forecasts for the July-September period this year have tracked the same trend, with estimates trimmed by 7 percent from the height of bullishness in January.

Samsung’s Non-Surprise Has a Positive Flip Side

Samsung’s shares have followed suit, closing down 20 percent from their Nov. 1 peak Thursday. They lost as much as 2.3 percent in early Seoul trading Friday.

Smartphone sales appeared to be even weaker than already damped expectations, though a complete breakdown won’t be available until later this month. Ironically, that means operating margin ended up being above estimates. 

What’s telling is that analysts are more bullish on the bottom line. Despite continued cuts to September-quarter revenue projections they now, on average, forecast a 17 percent increase in GAAP net income. The reason for this dichotomy would seem to be in semiconductors, where margins are fatter and Samsung is a world leader. 

Samsung’s Non-Surprise Has a Positive Flip Side

While people aren’t buying consumer electronics items such as smartphones and TVs like they used to, usage continues to be hot. Those bullish on Samsung consequently believe that demand for servers, storage and all the other back-end equipment that drives the internet is likely to remain robust.

Memory chips are crucial to this ecosystem, which is reflected in the fact that 25 percent of Samsung’s revenue came from that product category in the first quarter, up from 9.2 percent for full-year 2013. The result is operating margins charting a continued upward path to levels not seen since 2000.

If this trend persists, and the smartphone business can at least find some stability, then it’s possible investors will rediscover their love for Samsung.

©2018 Bloomberg L.P.