Samsung follows Apple, slashes profit forecast

The tech woes extend well beyond Apple. Image/Washington Post

Samsung Electronics dramatically cut its guidance for fourth quarter profits Tuesday as demand falls for its memory chips and smartphones. The world's biggest smartphone maker said it expects to see an operating profit of $9.7 billion, down nearly 29 percent from last year. Analysts had been expecting profits of more than $13.5 billion.

The South Korean tech giant attributed its tumbling profits to a rise in competition in smartphones and the increasing pressure of "mounting macro uncertainties." The company also pointed to "lackluster" demand for memory chips as a point of concern. Memory chips make up the lion's share of the company's profits and more than a third of its sales. Samsung emphasized that sales of memory chips were likely to improve later in the year as new smartphones are released.

"Part of the memory chip drop-off is the Chinese economic slowdown and the impact of the trade war, but it's also just part of the inventory cycle," said Mark Newman, a Hong Kong-based analyst with AB Bernstein. "The big four American tech companies and the big three Chinese tech companies bought a lot of memory in 2017 and 2018. And then last quarter they basically stopped buying."

Samsung's news comes just a week after a similar grim forecast from Apple, which lowered its sales estimates for the first time in 15 years due to slowing iPhone sales in China, according to chief executive Tim Cook. Apple's shares sank 10 percent and sent shock waves through the tech industry and global markets, as they struggle to price the threat of China's slowing economy.

Samsung stock closed down 1.7 percent on Korean Stock Exchange on Tuesday.

"Demand for smartphones has really fallen off a cliff," said Daniel Ives, an analyst at Wedbush Securities. "There's a lot of nervousness, especially when you have two of the most influential tech companies in the world, Apple and Huawei, in the middle of specific head winds. Now Samsung is just adding fuel to the fire in terms of worries."

Among the industries more vulnerable to China's economic outlook - jeopardized by President Doand Trump's trade war, along with an impending slowdown - tech stocks that once seemed unassailable have been hit hard over the past few months, with the Nasdaq falling 17 percent since its late August peak. The international tensions are colliding with a decline that's been a long time coming for smartphone makers, according to Jeff Kagan, a Georgia-based telecommunications industry analyst. As smartphones have become ubiquitous, innovation has slowed, giving consumers less incentive to swap their current phones for newer models each year. And despite the lack of innovation, prices have continued to rise.

"All customers care about are what smartphones cost and what they do," Kagan said. "But smartphone makers are charging more and giving customers less."

In emerging markets, which have been among the biggest growth drivers for smartphone heavyweights, customers are turning to lower-priced competitors, such as Chinese tech giant Huawei, that offer comparable speed, camera quality and memory for as little as $350.

"They're taking shares hand over fist from Samsung and Apple," Newman said.

The ills plaguing tech companies may have been forecast for a while, but the industry is still unaccustomed to this kind of uncertainty - and so are investors, Ives said. As smartphone makers have failed to reckon with declining demand, they're also held captive by turbulent trade negotiations with China, which could have a massive impact on production costs and international sales.

"It's a game of high stakes poker, and tech is caught in the swirls," Ives said. "If these negotiations drag out or don't have a clear resolution it's just going to add to the dark clouds over tech."

One of the pillars of the tech industry, Samsung makes its own products and supplies components to other tech juggernauts like Apple. Samsung had seen record profits over the last year and a half thanks to a boom in smart devices around the world. But recent months have seen a major dropoff in smartphone demand, with the company's shipments down more than 13 percent last quarter from a year ago, according to the International Data Corporation.

As Samsung and Apple search for ways to keep customers from switching to lower-priced competitors, they'll have to make the most of opportunities for advancement, like faster, 5G technology, Ives said.

"5G is going to be a big growth driver in the coming years," Ives said. "Samsung and Apple both need to hit it out of the park. Any misstep could be a major strategic blunder that could hurt them for years to come."

- Washington Post