Samsung's Q1 forecast defies coronavirus downward trends but it's unlikely to continue

Don't get comfortable, Sammy

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Samsung has published its earnings guidance for Q1 2020, and it's looking fairly sunny for the South Korean tech conglomerate, with revenue and profit both expected to show year-on-year growth.

Sales are forecat to hit ₩55 trillion (£38.8bn at today's exchange rates), up 5 per cent on Q1 in 2019, while profits are expected to reach ₩6.4 trillion (£4.28bn), up 3.2 per cent.

Looking at historical trends, it's likely components helped elevate Samsung's fortunes, with semiconductors representing half of the company's profits in 2019 – down from 75 per cent in 2018. The market strengthened in the tail end of last year, with industry-wide sales up 5.8 per cent to $26.8bn in Q3 2019, per World Semiconductor Trade Statistics.

Speaking to The Register, Gartner analyst Joseph Unsworth said he expects component demand to continue in the immediate term, primarily from cloud services required to facilitate home working and entertainment. Think Microsoft, Slack, Netflix and so on.

"At the end of the day, we believe that the coronavirus impact is driving some strong demand in some areas, particularly data centres," said Unsworth. "We see a very strong area in infrastructure, particularly for hyperscaling cloud players."

That said, some drop in demand is inevitable in other sectors, particularly those most acutely affected by the COVID-19 lockdown. This weakness will play out the day-to-day IT procurement side, as locked-down businesses defer tech spending.

Data also shows an uptick in memory prices after several consecutive months of decline during 2018 and 2019. In January, analysts at Trendforce noted that prices for NAND flash grew 10 per cent towards the end of 2019.

Other parts of Samsung's business look less rosy, however, with lacklustre sales of the Galaxy S20 series phones. According to the Korea Herald, domestic first-day sales of the Galaxy S20 series were half that of the Galaxy S10, with 70,800 units sold compared to the S10's 140,000.

This is almost certain to be an ongoing global theme due to the spread of COVID-19. Data from CCS Insight suggests the global smartphone sector could shrink 13 per cent in the 2020 calendar year, with much of the downward pressure exerting itself during the first half of the year.

At least Samsung was able to avoid most of the turmoil in the Chinese market, said Marina Koytcheva, veep of forecasting at CCS Insight. "In the first quarter Samsung's smartphone business was relatively well shielded from the difficult situation in China: it doesn't sell many phones in that country, and it doesn't manufacture there either. However, the difficult times for non-Chinese smartphone makers are just starting, as the rest of the world has now gone into lockdown, leading to falling demand for smartphones and the risk of a significant disruption to the global supply chain."

Koytcheva agreed businesses and consumers will adjust their buying habits in light of the economic disruption caused by COVID-19. Appetite for expensive flagships, like the S20 series, will dampen in favour of cheaper mid-range handsets, like the Galaxy A51. These pocket-pleasing phones tend to have smaller profit margins than flagships, which will inevitably hit Samsung's bottom line.

Samsung started strong, but it's difficult to see how this performance could continue across the year, thanks to macroeconomic factors beyond its control. Unsworth expects the biggest drop to appear in the second half of the year as demand across all sectors slumps.

A recession is almost guaranteed. At worst, the US could be faced with higher unemployment figures than those seen during the Great Depression, per the St Louis Fed. If this comes to pass, not even components can save Samsung's bottom line. ®

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