Samsung became the top supplier of DRAM in the mid-90s, and now has a 42% market share in 2020

Business Strategy & Outlook

Samsung Electronics has been a fantastic growth story as it established itself as the clear global leader in the smartphone space during the past decade, following its success in becoming the global top manufacturer of flat panel TV in the 2000s. However, no economic moat from its consumer electronics business, as these products are mature and difficult to differentiate, and are exposed to the tough competition from Chinese manufacturers. Unlike its competitor Apple, Samsung does not have an ecosystem that prevents users from switching to other brands. Meanwhile, Samsung’s semiconductor business will remain the profit driver in the longer term, driven by the robust growth of data traffic. Samsung led the global semiconductor industry in terms of revenue in 2017, knocking Intel from the top spot for the first time since 1992. According to Omdia, Samsung became the top supplier of DRAM in the mid-90s, and now has a 42% market share in 2020. The company is also the global top supplier of NAND with 34% market share. Demand growth for memory has been supported by the diffusion of digital devices, such as note PCs and smartphones, over the past two decades. The new telecom standards will not only enable richer content on existing devices, but will also ignite digitalization in non-IT industries, which will continue to drive the growth in data traffic. Also, the big data trend will accelerate from artificial intelligence demand.

Owing to technological obstacles, the costs necessary to achieve higher capacity per memory are becoming much higher than the past, which has forced smaller players to withdraw from the market. Samsung will maintain its cost advantage, which stems from a better product mix, underpinned by technical advantages and increased research and development expenses.

Financial Strengths

Samsung has a very strong financial position, with net cash (including short-term financial instruments) of KRW 103 trillion by the end of December 2020.Samsung shareholders should see an increased flow of shareholder returns over the next few years. According to its new shareholder policy announced in January 2021, the company expects to spend at least KRW 9.8 trillion on dividends from 2021 to 2023, which equates to a dividend of around KRW 1,440, implying approximately a 25% dividend payout ratio. The firm retains its commitment to return 50% of free cash flow in the form of either dividends or buybacks. If earned free cash flow over the next three months exceeds KRW 9.8 trillion, the remainder would be paid as special dividends at the end of 2023.

Bulls Say

Samsung’s flexible-screen advantage can be leveraged into increased smartphone market share.
The memory manufacturing market has consolidated to three or four main players, which could stabilize the market. Demand driven by mobile devices will allow this division to make up for any declines in mobile.
Samsung’s stock price is inexpensive, with shares having traded at a single-digit or low-double-digit P/ E ratio for the past few years.

Company Description

Samsung Electronics is a diversified electronics conglomerate that manufactures and sells a wide range of products, including smartphones, semiconductor chips, printers, home appliances, medical equipment, and telecom network equipment. About half of its profit is generated from semiconductor business, and a further 30%-35% is generated from its mobile handset business, although these percentages vary with the fortunes of each of these businesses. It is the largest smartphone and television manufacturer in the world, which helps provide a base demand for its component businesses, such as memory chips and displays, and is also the largest manufacturer of these globally.

(Source: Morningstar)

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