Samsung’s cycle still has some distance to run.
- Although Samsung appears to have recovered its mojo, I think that it is merely enjoying a product cycle which at some point will come to an end.
- This mojo was underscored by a successful launch event for the Galaxy Note 7 that went hand in hand with an improved Gear VR and a sales promotion that should help consumers to swallow the blistering $850 price tag.
- The most notable upgrade was the inclusion of an iris scanner that makes unlocking the device very simple and fun.
- This successful event comes on the back of two excellent quarters where margins in handsets have rallied to 16.3% in Q2 16A from 10.9% in Q2 15A and a 20% rally in the share price so far this year.
- However, the big question is where does it go from here.
- The good news is that I think that current cycle has some distance to run but the bad news is that all cycles come to an end.
- I am convinced that there is nothing special (other than its price) about the Galaxy s7 that has made it a success.
- Instead a confluence of events and good management by Samsung have meant that the Galaxy s7 is doing far better than Samsung could have hoped.
- I do not think that iPhone users are switching to Android.
- Instead those who currently own an S4 or an S5 are taking advantage of attractive pricing on a great product to replace their devices sooner than they normally would have done.
- This results in a classic product cycle where sales rally for a period of 6-12 months while users upgrade and then return to baseline.
- This is exactly happened to Apple with the iPhone 6 and is now happening to Samsung with the s7, albeit to a lesser degree.
- This cycle has led to Samsung shipping large numbers of the s7 which has also had the effect of consolidating unit volumes into fewer numbers of models.
- This always leads to better margins because components can be acquired in greater volumes and development only has to be done once.
- Samsung has also been very efficient at cutting its cost base and is being far more cautious with costs than when Galaxy ruled the Android world.
- Hence, I think that Samsung’s handset margins will stay strong for the balance of 2016 and then return to 9-11% which is I think is sustainable long term.
- However, analysts like straight lines and I suspect that many will now be forecasting that 16% is the new normal for Samsung.
- As a result, I suspect that by the end of this year 2017 estimates will be much too high.
- Consequently, I see disappointment in Q2 17 next year but until then, I think Samsung’s rally can continue.
- Even including a 20% discount for inferior corporate governance, I can still comfortably value Samsung at KTW1.9m some 23% higher than the shares are today.
- Hence Samsung remains with Baidu and Microsoft in my top 3 for 2016.
