Tariffs And Alternative Chemistries Will Erode Margins But Boost Capacity

Key Takeaways

• Accelerating adoption of alternative batteries and industry commoditization threaten Samsung SDI's revenue growth and operating margins through price competition and shifting market preferences.
  
• Reliance on a few automotive clients and heightened geopolitical, regulatory, and ESG pressures increase risks of input cost spikes, declining order volume, and unpredictable earnings.
  
• Expansion into affordable EV batteries, investments in advanced technologies, and diversification across energy storage and electronic materials position the company for sustained growth and improved profitability.

Catalysts

Manufactures and sells batteries in South Korea, Europe, China, North America, Southeast Asia, and internationally.

• The accelerating adoption of alternative battery chemistries-such as solid-state, LFP (lithium iron phosphate), and hydrogen fuel cells-could diminish demand for Samsung SDI's premium high-nickel lithium-ion products, resulting in long-term revenue stagnation as the core addressable market shifts away from the company's main offerings.
  
• Growing geopolitical tensions and protectionist policies, illustrated by new U.S. tariffs and localization requirements, are set to drive up operational expenses, disrupt supply chains, and reduce Samsung SDI's ability to compete internationally, leading to margin compression and unpredictable earnings.
  
• Increasing ESG scrutiny and stricter global regulations on raw material sourcing, particularly for cobalt and lithium, threaten to both raise compliance and input costs and constrain access to essential minerals, sharply impacting cost of sales and net margins over time.
  
• Heavy reliance on a small number of major automotive OEM customers, coupled with the risk that these companies could vertically integrate and move battery production in-house or diversify suppliers, exposes Samsung SDI to potential long-term declines in order volume and gross profitability.
  
• Intensifying industry commoditization, driven by aggressive price competition from Chinese manufacturers and rapid innovation cycles, is likely to accelerate average selling price erosion for batteries, further reducing revenue growth potential and squeezing operating margins throughout the cycle.

Samsung SDI Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Samsung SDI compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Samsung SDI's revenue will grow by 4.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 0.3% today to 4.8% in 3 years time.
• The bearish analysts expect earnings to reach ₩801.9 billion (and earnings per share of ₩9452.7) by about August 2028, up from ₩42.8 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 18.3x on those 2028 earnings, down from 401.1x today. This future PE is greater than the current PE for the KR Electronic industry at 15.2x.
• Analysts expect the number of shares outstanding to grow by 2.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.95%, as per the Simply Wall St company report.

Samsung SDI Future Earnings Per Share Growth

Risks

• Samsung SDI's strategic expansion into volume and entry-level EV battery segments, with a planned ramp-up in mass production of prismatic LFP and 46-phi cylindrical cells by 2028, suggests it is positioned to capture market share as the global electric vehicle market shifts towards lower-cost, higher-volume offerings, supporting long-term top-line revenue growth.
  
• The company's aggressive investments in next-generation battery chemistries, thermal propagation technology, and tabless cylindrical cells for differentiated performance could solidify its standing in premium and mainstream markets, enabling gross margin improvement as higher-value orders are won and new applications emerge.
  
• Growing demand for energy storage solutions driven by renewable energy expansion and the increasing needs of AI data centers presents Samsung SDI with ample revenue opportunities in utility-scale and UPS battery markets, with local US production set to improve operating margins and reduce tariff-related pressures over the coming years.
  
• The Electronic Materials business is expected to achieve sustained growth and stable profitability with the ongoing expansion of OLED and semiconductor materials markets-both forecast to grow steadily through 2030-which will help diversify Samsung SDI's revenue streams and bolster overall earnings.
  
• Deepening collaborations with major automotive OEMs and expanding manufacturing localization (such as in Hungary and the US), combined with multiple customer orders already secured for coming years, provide revenue visibility and scale advantages that could support continuous recovery in earnings, even amid ongoing macroeconomic challenges.

Valuation

• The assumed bearish price target for Samsung SDI is ₩135000.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Samsung SDI'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 ₩440565.0, and the most bearish reporting a price target of just ₩135000.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₩16856.9 billion, earnings will come to ₩801.9 billion, and it would be trading on a PE ratio of 18.3x, assuming you use a discount rate of 9.0%.
  
• Given the current share price of ₩218000.0, the bearish analyst price target of ₩135000.0 is 61.5% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.