Samsung Q3 2023 – Bottom canary pt. II.

More results to support the notion of a bottom.

• Samsung’s preliminary results came in better than expected adding weight to the possibility that the inventory correction is coming to an end which will allow revenues on consumer electronics to stabilise.
• Preliminary Q3 2023 revenues / EBIT were KRW67tn / KRW2.4tn which were in line with expectations but crucially, were better than the whisper numbers had been predicting.
• Revenues were down by 13% YoY and profits by 78% YoY, but it is worth bearing in mind that the comparisons to Q3 2022 are very difficult as it was not until Q4 2022 that the real problems began.
• Many commentators are already calling for a recovery in Q4 2022, but I think that this is optimistic given the macro factors that the global economy is currently wrestling with,
• In the last 3 quarters consumer electronics demand has been hit especially hard by high inflation causing consumers to cut back on device replacements
• Component inventory corrections by device makers have also added to the problems.
• Device makers increased inventories during the pandemic due to strong demand and supply uncertainty but then reversed their positions to release cash as demand fell and supply improved.
• This has hurt suppliers upstream of device makers who have had to contend with both weak demand and an ongoing inventory correction.
• This is why it is these suppliers who have seen the largest YoY declines in revenue which have hurt both their revenues and their share prices.
• Furthermore, the inventory correction has lasted much longer than many expected which has forced suppliers to cut their forecasts with very little visibility of stabilisation let alone recovery.
• These numbers combined with TSMC’s monthly revenues disclosed on 6^th October give me increased confidence that at least the inventory correction has come to an end.
• This leaves component suppliers still exposed to the weak consumer electronics market, but the double whammy of device makers also winding down inventories looks like it might have ended.
• Most component vendors have long given up trying to forecast the end of the correction and so I think that there is a good chance that Qualcomm, SK Hynix, MediaTek, Samsung and so on discuss their business with a little more optimism when they publish their full results later this month.
• Of all of the component suppliers, Qualcomm is now trading at the bottom of its peer group in terms of PER ratio which demonstrates just how short-term the market thinks.
• I continue to think that the long term is looking surprisingly good.
• There is no end in sight to its sales of 5G modems to Apple, it is winning enough deals in automotive to seriously disturb Mobileye and it is very well positioned for the Metaverse when or if it takes off.
• The problem is that the fickle market only cares about the weakness in the smartphone market meaning that from a long-term valuation perspective, the shares are on sale.
• However, if the inventory correction is now over, then there is scope for the shares to recover as revenues stabilise.
• There are a lot of risks, especially around China but Qualcomm has a better route out of problems in China than Apple should the Chinese state start to properly retaliate against the sanctions that have been placed upon it.
• I already have a small position in Qualcomm.