Samsung Galaxy Note7 scenario is become like a disaster movie scene. We might think it couldn’t get worse for Samsung. Last week Samsung stopped the production of Note 7 when consumers complained about phone explosion even after their first recall. A second replacement which is unheard of in any industry.
Inspite of Samsung losing Billions of dollars because of Note 7 fiasco, it has not shaken the investor enthusiasm. Also we saw a dip in share prices during this entire scenario, since then share prices have recovered. In fact, the share prices opened @ $1,425 per share on Oct 14.
So what does this volatile share price mean?
Phone sales are simply not that important for Samsung nor to its investors. As per some analysts Samsung expects to bring in about $ 103 billion in smartphone sales this year. Meaning the impact would be very marginal.
Selling smartphones is just one of the way which Samsung makes money. It’s just a part of bigger Samsung group.
Samsung has 4 main divisions:
o Consumer electronics, which make appliances like washing machines, refrigerators and televisions.
o Displays, where they produce screens for mobiles, TVs and computers and which is sold to other manufacturers.
o IT and mobile communications, which includes mobile devices, desktops, laptops, digital cameras and network equipment’s
In early 2011-2012 when consumers where ditching their feature phones and moving towards the smartphones. Samsung’s profit primarily came from IT and mobile communications unit. But now the scenario is changing profits this year is expected to be 50-50% split between mobile phone and the display and semiconductors. In coming years the latter is expected make up the major profits .
Phones are making less profits to Samsung
Samsung’s Smartphone profit is shrinking, because the global smartphone sales have become stagnant. Along the way more and more competitors have entered into market and competing more fiercely for customers which is causing the prices to go down and which in turn is causing reduction in profit margin.
Meanwhile Samsung is way ahead in the competition of display and semiconductors segments. It’s the Market leader for the OLED screen technology which is way better than the LCD’s which we have now. Samsung controls around 95% of the OLED market. And this is expected to grow more as all the manufacturers are ditching LCD for OLED.
At one side they are market leaders in display technology on the other side they are again ahead of the competition in flash memory, which saves the data when power is cut. In 2013 company released the first 3D NAND chip, a huge Improvement upon 2d Planar NAND, roughly 3 years before the competitors caught up.
Investors are seeing bright prospects in Samsung. Infact few say Samsung’s Market Cap is lower than it should be.
If the Exploding phones problem persists, will it eventually bring the stock prices down? They could, If the ongoing phone sales drop as a “hard landing” .
In Q2 2016 Samsung had around 22% market share for the shipped smartphones. If consumer look beyond the Note 7 fiasco and keep buying Samsung products the division revenues persist. But if Samsung’s brand image is tarnished beyond the repair, Income from phone could sink beyond the point where its other divisions find it difficult to compensate.