The End of Samsung

Samsung, Korea’s stalwart chaebol, is toast.

Remember the past two years when lockdowns were in vogue?

Digital products were the hottest item in the world as everybody was stuck in their homes.

Growth brought forward is never a bad thing for a company, especially tech companies.  

However, it sets the stage for hard comps to topple and a reversion back to the mean which can look messy.

The world needed chips and phones back then, the world is now traveling, getting on planes, and taking cruise ships to the Caribbean.  

This is why video game growth is quite subdued this year.

Samsung internally has also been taking a machete to its forward-looking estimates multiple times in order to front-run collapsing demand.

The boom bust nature of chips and devices is an inherent beast in the industry that is hard to tame.

Samsung was able to hit watered-down targets in the second quarter, but that was mainly due to a 7% currency tailwind of the Korean won sliding fast just like many Asian currencies.

Take a look at the Japanese yen, it’s gone off a cliff all the way to 136 per $1.

I remember when I took a vacation to Tokyo in 2011, Japan felt awfully expensive at 77 yen to $1.

The currency tailwinds are a transitory elixir yet under the hood, these economies are weakening fast.

The aging population and cost of living crisis are also crushing sales.

Internal data reveals deeper damage than initially thought.

Operating profit missed by a wider margin than revenue beat and prices for its premium products isn’t fetching the prices they once did.

For example, Samsung markets its Exynos 2200 chips as on-par rivals to the Snapdragon 8 Gen 1 and Apple’s (AAPL) A15 Bionic chip found in smartphones.

However, the Exynos fails to compete with its supposed flagship chip comps, performing at levels lagging almost a generation behind in speed and functionality.

It’s clear that devices made with Exynos chips simply won’t be able to sell for as much as flagship Android phones with Snapdragon 8 Gen 1 or Apple iPhones with A15 Bionic chips.

I fully expect the operation profit to go from 6% to 3% for Samsung.

US rival Micron (MU) has already rung the alarm. While the world’s third-largest maker of DRAM posted revenue and operating profit for the quarter in line with estimates, its forecast for the coming three months was 20% lower than expectations.

It now sees the PC and smartphone markets much weaker than previously thought.

Tech has experienced a massive downgrade in terms of sentiment and sales while massive pressure on the supply side costs.

Cloud computing and streaming services which all need chips have been the poster boys of underperformance.

Growth stocks have also gotten killed.

I do believe this is more a signal of deeper individual malaise at Samsung and an indication they are getting trounced by Chinese firms who just do it better for cheaper.

Margins won’t ever come back up for Samsung as they lack the nimbleness of the Chinese and brute power of the American tech.

They are essentially stuck between a rock and a hard place where products will become less competitive, face rapidly shrinking margins, and participate in a Korean economy that lacks vibrancy.

Once chip stocks bottom, avoid Samsung, and get into Qualcomm (QCOM) and Micron (MU).