Say Samsung, and smartphones come to mind at once. Profitability there is slipping; ergo, Samsung’s shares must slip too. They are off 14 per cent from their January 2013 peak, and wobbled on Tuesday’s news that it only expects T$8.4tn ($7.9bn) in first-quarter operating profit. Yet Samsung is the most-loved big tech stock in the world, measured by analysts’ “buy” calls, beating Apple, and comfortably ahead of chipmaker TSMC at number two.
If phones struggle, what remains of Samsung is mostly chips and cash. It churns out mountains of both. The chip business could soon provide steadier profits and higher free cash flow. Samsung already dominates in memory chips, a sector that has stabilised. Its opportunity is in application processors, the brains of mobile devices. Samsung, now that Apple has taken its production elsewhere, has the capacity to compete as a contract manufacturer against the likes of TSMC. In an industry where investment matters, Samsung’s $41bn in net cash will help. TSMC is spending, amazingly, almost half of its sales on capital investment – but it still manages to make returns on investment that are broadly in line with Samsung’s.
Optimism about Samsung (94 per cent of analysts rate it a “buy”) is supported by its valuation. It trades at seven times forecast earnings – half the average for big tech stocks. There are reasons for this: a heavy weighting in Korea’s Kospi index and its position in the tangled Samsung chaebol. The key to a re-rating will be unlocking the value of the cash – Korean companies and tech companies both tend to hoard cash; Samsung is both. The best outcome may be that Samsung finds another business which, like chips, is both capitally and technologically intensive, yet has a longer half-life than consumer gadgets. Is the world ready for a Samsung electric car to rival Tesla’s?