Samsung Gives First-Ever Earnings Warning as Semiconductor Troubles Mount
Samsung warned that it would miss Q1 earnings expectations today in the first such message the company has ever issued. It’s a warning sign for tech stocks and the semiconductor segment, plus a sign that the next few weeks aren’t going to be happy ones.
Previously, Samsung was expected to report a 7.2 trillion won ($6.4B) operating profit for January through March. That’s already a decline of more than 50 percent compared with the firm’s results from a year ago. The company’s warning was terse, stating only that “The company expects the scope of price declines in main memory chip products to be larger than expected,” but that’s significant in and of itself.
Samsung’s memory business is under heavy pressure from declines in the DRAM and NAND market. After a burst of data center building last year, a number of semiconductor firms have predicted a relatively weak first half. But Samsung is hit coming and going by these kinds of problems. It counts companies like Apple among its major display customers, which means any slowdown in iPhone demand will hit that business. Its memory business is similarly exposed. DRAM prices are in freefall and NAND prices have dropped significantly.
On top of these concerns, Samsung and other semiconductor companies face uncertainty over ongoing US-China trade tensions and concerns about a weak Chinese economy. The issues aren’t unique to Samsung; Micron also warned on earnings last week. Memory manufacturers are in for a rough ride over the next 12 months as new foundry capacity comes online and the capacity concerns that shaped the last few years ease, at least temporarily.
Right now, a number of companies have forecast a weak first half to 2019, with sales recovering in the second half of the year. There’s some reason to hope this will happen — AMD’s new 7nm Epyc and Ryzen CPUs and Intel’s Cascade Lake AP will both be available in H2, offering a significant increase in CPU core counts to customers of both companies. AMD’s Navi GPU should also be available, along with the usual iPhone product refreshes, which always boost Apple sales in the back half of the year. Windows 7 will also be roughly six months away from retirement by that point, which may boost corporate refresh cycles as well.
We wouldn’t expect to see anyone making robust predictions about demand in the back half of the year, but how companies update their 2019 guidance will give some indication of what to expect. If Samsung, Micron, Intel, and other firms stick to their predictions of a recovery, we could see things rebound fairly quickly. If they start pushing back the anticipated return to growth, it could mean things will get worse before they get better.
A resolution to the ongoing US-China trade war would provide a confidence boost, but a quick deal is not expected. U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin will travel to China on Thursday to meet with a Chinese delegation to resume talks. Bloomberg has already suggested that the Chinese may import a record amount of US pork to end the trade war. Chinese pork production has been down sharply after an outbreak of African swine fever.
A desire to maintain a constant, steady supply of bacon may wind up helping to resolve a trade dispute that’s dragging down overall performance of the semiconductor market. This is either a further sign of the End Times or a fuzzy, heartwarming tale about finding our common humanity in a mutual love of pork products. I’m not sure I can tell the difference anymore.
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