Samsung Electronics Co Ltd (005930.KS) on Tuesday issued unexpectedly weak quarterly earnings guidance which sets it on course for its worst results in two years and cast doubt on the smartphone leader’s strategy against cheaper Chinese rivals.
Though the South Korean company said it found out better business conditions in the third quarter, it faces slowing market growth, intensifying price competition at the lower end and the hovering threat of Apple Inc’s (AAPL.O) next iPhone.
“The earnings deliver a rough reality check to Samsung that it is not Apple, but Samsung. Its scheme of selling phones at expensive prices will not work anymore, as Chinese rivals also offer good enough phones at much cheaper prices,” Lee Seung-woo, a technology analyst at IBK Securities, said.
“Samsung needs to review its smartphone strategy,” he said.
While smartphones drove the Samsung to record net income last year, the market is growing.
Research firm IDC predicts global shipment growth will slow to 19.3 percent this year from 39.2 percent in 2013, while average sales prices will also miss.
Some analysts said Samsung may have no option but to cut down prices for mid-to-low tier devices, where growth is stronger, to go after Chinese rivals such as Huawei Technologies Co Ltd [HWT.UL] and Lenovo Group Ltd (0992.HK). While that would help defend market share it would also hurt margins, curbing its earnings recovery in the short term.
The society alleged it “cautiously expects” a better third-quarter outlook with the passing of a new smartphone lineup, lower marketing costs and a seasonal rise in demand for its memory business. Its flagship Galaxy Note 4 is expected to come to the market in September
CIMB analyst Lee Do-Hoon, one of the few to accurately predict Samsung’s second-quarter guidance, stated the company appeared to be taking longer to come up to the challenges it is facing in the mid-to-low end of the marketplace. He did not anticipate a meaningful third-quarter earnings recovery and predicted that analysts would cut their forecasts
“Samsung has been talking about toning up its mid-to-low tierlineup, butt we found that this has not occurred thus far and will need more time,” he stated
Shares in Samsung, down more than 10 percent since the beginning of June through Monday, jumped as much as 2.1 percent after the earnings guidance, as some analysts said the second-quarter results may mark a low peak in earnings. The stock later gave back much of that increase.