What is the Market or Me Not Comprehending About Samsung?
Let me preface this: no position in any company mentioned here right now, nor ever. I am also aware that in this write-up, I am superficially scratching the surface. There is a lot that can be analyzed through both qualitative and quantitative research/analysis, but for now I am trying to be directionally correct, and am concerning myself with relative valuation. Many businesses mentioned here have different revenue streams, each of which can be analyzed using Porters Five Forces analysis, but I haven't tried to do that yet. So with that out of the way:
Valuation: Samsung Electronics is so cheap in terms of valuation that this it's a joke. How come a company with so superior growth prospects trades at discount of ~70-80% (on TEV/NTM Revenue, TEV/NTM EBITDA), and 12% (on a P/LTM ) to the average of the 3 comparables (Apple, Google, Microsoft). Samsung Electronics' current TEV/ Revenue is about 1.5-2x, depending upon whether you look at it on a LTM or a NTM basis, but doesn't matter, as that's DEFINITELY WAY less than some of what these early-stage Silicon Valley start-ups raise money at (where business models might not be even that established or there is still a clear lack of direction). This DOES NOT MAKE ANY SENSE at all…
Top-line growth: ~67% of Samsung Electronics' Revenue comes from IT & Mobile Communication (36%) and the remaining from the Semi Conductor space, so I am going to focus on these two first.
- IT & Mobile Communication: You can look at any stats published there, but it's clear that within the global smartphone space, Apple and Samsung are the two leaders, where maybe Apple is ahead of Samsung in the Americas. I did a small survey on ~42 folks, where 70% of respondents were based in Americas. 64% of the 42 respondents used Apple, but when asked which smartphone manufacturer would they switch to, ~40% said Samsung. Further, 72% of respondents said they'd want to pay between $300 - $1000 for a smartphone, which means that consumers are getting fed up with these rising smart-phone prices but with limited innovation. 63% stated they wanted price increases to be capped, and ~50% want the smartphone manufacturer to do a better job at integrating its tech/products with other devices that consumers use daily. Now obviously Samsung's phones are priced in the same range as Apple's, but Samsung's growth upside (in term of further market penetration) is more than Apple's. This should be an obvious point. I'd love to be proven wrong, but to me it seems that whatever Apple does, Samsung offers too, and so there isn't really a significant edge that Apple has (other than its brand awareness).
- Automobiles may be the next thing where there might be room for innovation, but Apple is leaping on a self-driving car, which might work, but I am skeptical. It didn't really work out for Google, and I am not sure if there is any reason right now that leads me to believe it'll work out for Apple too. Tesla is the most well-positioned for this market (for various reasons), and whatever market share entrants might win will come at huge costs. Meanwhile, Samsung seems to be doing the smarter thing and working with Tesla to provide chips (more on this below), and partnering with the established automobile brands (BMW, Audi, Ford) on how to improve the digital experience for customers, which is essentially what 50% of the people in my survey responded that they wanted to see. Something else that Samsung announced, which gels in with this point, is a partnership with Microsoft. (you can google the details, this is getting very lengthy already). It also announced some program called iTest, which lets current Apple users see what it is like to switch Samsung. I am not sure how successful this has been, but it seems like a step in the right direction (will expand on this later).
- Consumers' frustration with price increases (63% of respondents): I understand that NAND Flash, Display, and Application Processing are the most expensive components as it relates to the body of a smart-phone, and for all three of these, Samsung has a leading market share, which gives me the impression that (Cetirus paribus) it's not at the whim of a supplier for its procurement decisions, and if it did want to sustain its price level, it could. Unsure though if high smartphone prices act as a signaling effect for quality, but I am assuming if they do, this is the beginning of the end.
- Semi-Conductors: Semi-conductor seems to be the next battle front, and TSMC seems to be the dominant player here followed by Samsung. High capex intensity and building time generates high barriers to entry. But unlike Apple, which relies on TSMC for its chips, Samsung does not seem to be. It's revenue from Semi-Conductor segment have grown at a CAGR of 15% between 2015 and 2021, and represented 31% of its top-line in 2021 (vs. 15% in 2020). Operating margins for this segment have grown from 12-14% to almost double-fold. With so many future applications (for instance gaming) reliant on these chips, this is a very positive sign for Samsung. I also want to add here that I don't know how China/Taiwan's relations may impact TSMC, but it is something to add, which might negatively impact TSMC's market share (currently at ~50%+).
So these are two areas where Samsung clearly has an edge, and I think there might be room to further build.
- I am unsure whether Samsung compensates its executives in the form of stock options. It obviously should, would be very odd if it didn't, but I can't find disclosure on it. Improving disclosure and transparency is important here. All its comps have this information easily accessible
- I am unsure of how much value does the Consumer Electronics segment add to the overall Samsung Electronics' business. Revenue has increased at about 1% CAGR, which isn't really that different from Samsung's Mobile Communication business (2%), but the latter has margins' 2x greater than the former and is a formidable player in its market. Contrast that with TVs where there seem to be too many players operating. I was at a Best Buy Store in Toronto, and was amazed at how cheap some of these TVs seemed to be (Samsung 85 Inches 4K TVs costs less than a Apple MacBook WTF?)…just demonstrates the level of competitive rivalry here (you've got Sony, LG, Haier, Panasonic, TCL, and maybe some others too that I am missing). I haven't spent a lot of time exploring what would be the best way to proceed with this segment, but maybe spinning it off could be a possibility?
- Samsung, I think, might have room to improve its brand awareness in the Americas. Based on a few trips to a A-grade mall located in a high foot area (downtown Toronto), I am always impressed and shocked by how few people I see in the Samsung store (relative to Apple, which is hidden inside the mall). You cannot miss the Samsung store. But traffic is lagging. I think the company can explore some kind of strategic alternative with respect to its Electronic business, and use the cash flow to invest more in SG&A. For the sake of being consistent across all four comps, I am using SG&A as a proxy for marketing / advertising expenses, and Samsung's L4 year average SG&A expense (as % of revenue) has been 14%, while for Microsoft and Google this is more in the 17-19% range. , which is very well-known, allocates ~20% of its top-line to SG&A. Apple is cocky, it only spends 6-7%, but then Apple probably doesn't need to for a variety of reasons (that I won't elaborate on here). Maybe Samsung gets better celebrity endorsements and all that kind of stuff. I can't claim that I know what Samsung's marketing strategy should be, but it needs some ZING.
- Samsung's EBITDA to FCF conversion is nearly in-line with Apple's. But capital returned to shareholders in the form of dividends and stock buybacks (as a % of beginning cash balance) is around 40% vs. 307% for Apple. Microsoft and Google have returned about 300% and 130% respectively. Returning some capital here may send the right, obvious signal here, which is that management thinks the market undervaluing the stock here, and it's not as if the company is starving for cash here. It's cash balance (converted in USD) is about ~$20-25BN, which is nearly as much as Google's and almost twice Microsoft's. Now maybe it is saving cash to build a semi-conductor factory, I don't know, but that seems to be something being done as a part of a consortium.
So, that's it. I didn't need to write a 1500-2000 word essay on this. But wanted to make it obvious how grossly undervalued the company and its growth prospects are. Maybe the Western investors have corporate governance concerns, which might be reasonably-founded, but at current price levels and keeping in mind the growth avenues available to Samsung Electronics, the margin of safety for a 24-36M investment seems compelling enough…