Given that AAPL is among Samsung's largest customers, as Samsung supplies memory chips and smartphone screens to the company, Samsung’s downbeat guidance doesn't necessarily come as a huge shock in the wake of Apple’s guidance press last week. That earlier moderation of expectations helps to explain why investors seem to be taking today’s news in stride as Samsung shares on the South Korean stock market only traded modestly lower. The major indices here have rallied higher despite the news.
On that point, Samsung is coming off a rough year in which its stock dove by nearly 25% as analysts began routinely cutting estimates on the name in the fourth quarter. In fact, according to Bloomberg, at least ten analysts lowered their estimates over the past four weeks. So, again, SSNLF's soft guidance was already largely baked in and anticipated.
Still, that doesn't mean that Samsung, or the memory chip market in general, is out of the woods now. The company and its peers are facing a few potent headwinds that figure to pressure the top line, margins, and ultimately earnings over the near-term at a minimum. First, demand for memory chips -- Samsung's largest revenue generator -- has significantly dried up, following a two-year boom in which growth was spectacular. Furthermore, the slowdown isn't only coming from the data center arena, but it is also evident in the smartphone market, as illustrated by Apple's downside guidance. To put that issue into further perspective, Samsung said that global smartphone shipments contracted by more than 13% in 3Q18.
The problem is connected to both supply and demand. During that aforementioned boom period for memory chips, large data center companies like Google (GOOG) were loading up on memory components, causing chip makers to sharply ramp up production. Now, as demand has taken a turn for the worse, there is some saturation in the market. On the demand side, the economic slowdown and trade concerns in China have taken a toll. As you may recall, AAPL specifically cited weakness in China as a major factor regarding its lowered outlook. This one-two punch has created an unfavorable climate for chip pricing. According to industry reports, prices for 32-gig DRAM modules have dropped by about 5% while 128-gig NAND flash memory chips have seen a 3.4% dip in the December quarter.
Investors shouldn't expect a recovery in the short term, either, as Q1 is a seasonally slow period and as it will take some time to work through that supply glut. Instead, Samsung commented that it expects conditions to brighten in 2H19 as new smartphones launch and as it rolls out new products, such as its foldable screen phone, which is set to ship later this year.
While Samsung’s guidance didn’t come as much of a surprise, coming as it did on the heels of Apple’s refreshed outlook announcement from last week, this guidance does add further clarity into the headwinds facing the memory chip and smartphone markets.