US China Tensions And Oversupply Will Crush Margins

Key Takeaways

• Heightened geopolitical and regulatory pressures threaten to disrupt supply chains, raise costs, and constrain Samsung's global market access and strategic flexibility.
  
• Industry commoditization, fierce competition, and demographic shifts are likely to erode margins, limit revenue growth, and challenge the sustainability of Samsung's profitability.
  
• Leadership in advanced memory and semiconductor technology, vertical integration, and AI adoption drive Samsung's profitability, resilience, and long-term growth across diverse markets.

Catalysts

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• The ongoing and intensifying geopolitical tensions, especially the unpredictable evolution of tariffs and export controls between the U.S., China, and other major markets, are likely to disrupt Samsung's global supply chains and limit its market access, increasing operational costs and casting significant uncertainty over both revenue growth and stable earnings in the medium to long term.
  
• Commoditization within the memory and logic semiconductor segments, combined with the heavy, ongoing capital investment cycle Samsung is locked into, raises the risk of chronic oversupply, margin compression, and low return on invested capital even as the overall industry invests to meet ambiguous AI-driven demand, all of which could materially erode net margins and long-term profitability.
  
• Growing pressure from aggressive Chinese smartphone and display makers is diminishing Samsung's competitive differentiation in key product lines, risking serious market share erosion and intensifying pricing pressures across its largest revenue streams, which in turn threatens both top-line growth and operating margins.
  
• Elevated regulatory and ESG requirements-ranging from energy use and carbon footprint regulation to global antitrust scrutiny-are set to substantially increase Samsung's capital expenditures and ongoing compliance costs while potentially constraining its strategic flexibility and vertically integrated business model, ultimately weighing down future earnings.
  
• Demographic headwinds, such as aging populations in mature markets and weakening consumer demand for high-end electronics, will limit the growth of future device sales and depress average selling prices, putting continual downward pressure on revenue and posing a structural challenge to Samsung's long-term volume-driven business model.

Samsung Electronics Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Samsung Electronics compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Samsung Electronics's revenue will grow by 1.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 11.1% today to 7.9% in 3 years time.
• The bearish analysts expect earnings to reach ₩25324.7 billion (and earnings per share of ₩3758.2) by about July 2028, down from ₩34056.4 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 18.0x on those 2028 earnings, up from 13.0x today. This future PE is greater than the current PE for the GB Tech industry at 9.3x.
• Analysts expect the number of shares outstanding to decline by 1.29% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.46%, as per the Simply Wall St company report.

Samsung Electronics Future Earnings Per Share Growth

Risks

• Robust growth in AI-driven demand for memory, high-bandwidth memory (HBM), and semiconductors for servers, PCs, and mobile devices is fueling a secular trend that supports rising sales, operating profit, and future revenue expansion for Samsung Electronics.
  
• Samsung's leadership in advanced technology development, including timely investment in next-generation DRAM, NAND, and 2-nanometer GAA process foundry capabilities, positions the company to capture premium pricing and sustain net margin improvement as industry demand recovers.
  
• The resilience and vertical integration across Samsung's diverse business lines-from smartphones and foldables to displays and home appliances-create opportunities for cost efficiencies and cross-segment innovation, providing a buffer for earnings and profitability even amid macroeconomic uncertainty.
  
• Accelerated shareholder returns via ongoing share repurchases, dividend increases, and stock-based compensation tie executive incentives to long-term value creation, providing structural support for share price and overall market capitalization.
  
• Expanding adoption of AI, premium smartphones, and OLED display technologies across IT, automotive, and wearables, combined with Samsung's increasing presence and brand strength in these markets, offer long-term revenue and gross margin growth opportunities despite near-term challenges.

Valuation

• The assumed bearish price target for Samsung Electronics is ₩55559.57, which represents two standard deviations below the consensus price target of ₩73677.5. This valuation is based on what can be assumed as the expectations of Samsung Electronics's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₩90000.0, and the most bearish reporting a price target of just ₩48000.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₩321716.5 billion, earnings will come to ₩25324.7 billion, and it would be trading on a PE ratio of 18.0x, assuming you use a discount rate of 8.5%.
• Given the current share price of ₩66400.0, the bearish analyst price target of ₩55559.57 is 19.5% lower.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.