Samsung Q2 2020 – Loving lockdown.

Semiconductors pull a blinder.

• Samsung has indicated that it has had a good Q2 2020 almost certainly because the stay at home trend has continued to productivity electronics and data centre demand offsetting what has most likely been a weak quarter in smartphones.
• Q2 2020 revenues / EBIT was KRW52tn (down 7.2% YoY) / KRW8.1tn (up 23% YoY) ahead of estimates of KRW49.9tn / KRW6.3tn.
• EBIT was very likely to have been skewed by a compensation payment from Apple of around KRW1.0tn as a result of not fulfilling its display capacity promises, but even adjusting for that, the results were comfortably ahead of forecasts.
• This is most likely to have been a result of the stay-at-home and work-from-home trends that have substantially boosted demand for productivity equipment and data centre capacity.
• This is evident in the numbers where a smaller beat on the revenue line has produced a much larger beat in operating profit.
• Samsung’s semiconductor business is far more profitable than handsets reporting a 23% margin in Q1 2020 compared to 10% at the mobile business.
• This means that for every Won that the semiconductor business beats revenues by, one would expect that the handset business would have to beat revenue expectations by 2 Won to have the same effect on operating profit.
• This combined with the fairly numerous pieces of evidence that the smartphone market bounced off the lockdown lows but has since softened somewhat strongly suggests that this performance is predominantly coming from semiconductors.
• This performance underpins my view that the lockdown trends are persisting beyond the end of the lockdown itself.
• This is because while people can go out and go to work again, they must do so under restrictive conditions.
• One of these is office rotations where portions of the workforce are working at home at any one point of time.
• This means that everyone still needs better home productivity equipment and makes greater usage of cloud services despite the ending of the lockdown.
• I expect this trend to be echoed by Intel, Microsoft, WDC, Seagate, Lenovo and so on during the reporting season that is almost upon us.
• Hence, Q2 2020 looks like it will be very similar to Q1 2020 with the added benefit of greater economic activity that set in towards the end of June that should help improve the outlook for Q3 and Q4 2020.
• However, I do not think that all the problems are over and it is clear that we are in a recessionary environment but the sky is not falling on our heads just yet.
• That being said, the valuation of the stock market continues to defy reality meaning that there remains plenty of scope for a further correction should the current second wave of cases continue to gather momentum.
• I remain happy to be on the sidelines of the stock market.