Spot prices on DRAM soar 37 percent

Samsung Electronics Comp., Ltd. (KSC:005930) is perhaps best known for its consumer electronics devices which include appliances, televisions, and smartphones.  But the South Korean firm is also a power player in the commodity market on key computer components like NAND flash storage and DRAM (memory).

I. DRAM Shortage is a Boon for Samsung

As the DRAM market slumped in 2011, this key source of profit for Samsung dried up.  But Samsung could only complain so much -- by late 2011 it was estimated to be the only chipmaker turning a profit on DRAM, and it was profit-taking on record smartphone sales.

Now the situation has flipped somewhat. Samsung has seen sales of its best-selling Galaxy smartphones -- which run Google Inc.'s (GOOG) Android operating system -- slump, but has seen a recovery in DRAM prices drive it to new heights of profitability.

Samsung semiconductor sales are at their highest levels since 2010.  In the second half of the month of September, DRAM contract prices climbed 9 percent.  And spot prices -- non-contract commodity prices -- on DRAM chips rose a whopping 37 percent.
Samsung DRAM
Samsung is cashing in, in the wake of a DRAM supply shortage [Source: regmedia]
The price bump comes in part via supply struggles from SK Hynix Inc. (KRX:000660), a top DRAM supplier.  A fire broke out last month at SK Hynix's DRAM line in Wuxi, China, a facility that accounts for 10 percent of the world's DRAM supply.  While production is expected to fully resume this month, the shutdown is expected to cut SK Hynix's output by 14 percent, and leave the overall market with a 7 percent deficit in components.

The fortunate shift in the component market has Samsung poised to exceed last year's profit by a third, according to an analyst survey.  A 45 analyst survey by Thomson Reuters I/B/E/S expects Samsung to turn a 38.5T KRW (won) ($35.85B USD) for the calendar year 2013.  Samsung announced that it expects to make 10.1T KRW ($9.42B USD) in Q3 2013.

II. Galaxy Smartphone Sales Slump

However, slumping smartphones have analysts worried about the long-term outlook for Samsung.
Samsung Galaxy S4 wide
The Galaxy S IV

Cheap smartphones in developing markets like China and India are expected to boost Samsung's smartphone sales from 76 million units in Q3 2012 to 86-88 million units.  But sales of the premium Galaxy line have been less than stellar.  Samsung is expected to sell as little as 16 million Galaxy S4 smartphones in Q3.  Samsung moved 20 million GS4s between the launch of the device in April and the end of June.  But the bottom may yet to be hit; Samsung is expected to sell as little as 13 million GS4s in Q4 2013, according to Barclays PLC (LON:ARM) analysts.

Tech analyst Lee Seung-woo, of South Korea's IBK Investment & Securities comments to Reuters:

As of now, there is no real competitor for Samsung in the (memory) chip business.  This dearth of players is expected to allow Samsung to post considerable operating profits throughout this year and next year, even if demand flags.

[But] the concern that high-end smartphones could see slower growth is a valid one. But Samsung has both the speed and fast-follower tendencies of Zara and a portfolio spanning high- and low-end products as well as components such as a brand like Swatch.

Some have complained about the "cheap" feel of the plastic-bodied Galaxy S4.  Plastic-body Androids with similar specs have been fielded by Chinese OEMs, such as Huawei Technologies Comp.'s (SHE:002502) Ascend P6.  Samsung faces a number of rivals with more intricate body designs as well such as the Apple, Inc. (AAPL) iPhone 5S, which faces a refresh to device's iconic metal-and-glass industrial design.  Apple reportedly sold 9 million iPhone 5S/5Cs on its launch weekend, and many of those sales were reportedly accompanied by trade-ins of Samsung smartphones.

Nokia Lumia 1020 
The Nokia Lumia 1020 (L) and iPhone 5S (R) are among the smartphones denting GS4 sales.

Likewise the Nokia Oyj. (HEL:NOK1V) Lumia 1020, which packs a colorful body and industry-leading camera, and an unnamed upcoming 6-inch curved smartphone which LG Electronics Inc. (KSC:066570)  is set for a November launch, according to Reuters.

More trouble may lie ahead, as well, as Microsoft Corp. (MSFT) and Nokia have teamed up to try to force Android OEMs to use Windows Phone instead.  The pair have reportedly threatened HTC Corp. (TPE:2498) with a sales ban if it did not switch.  Samsung was previously targeted by Microsoft and settled with a big licensing deal -- so it seems a likely next target if the strategy succeeds.  If Samsung is forced to switch, it does have a bit of experience making Windows phone, having made a Galaxy-like "Ativ S" Windows Phone.  However, it would certainly add a new challenge to Samsung's sales outlook if this happens.

Financially things could be worse for Samsung; HTC posted its first quarterly launch in Q3 2013, as the once-dominant Taiwanese phonemaker continues its market plunge.

Source: Reuters

"It seems as though my state-funded math degree has failed me. Let the lashings commence." -- DailyTech Editor-in-Chief Kristopher Kubicki

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