Samsung’s profit warning doesn’t mean a technology recession is here, but it tells us that the odds of a further deterioration are climbing
Tougher times are ahead for the technology industry.
A downturn sparked by excess inventories and weakened demand, signs of which were evident back in August, could drag on longer than expected.
Samsung Electronics Co. said Tuesday that first-quarter results will fall short of estimates. The rare profit warning came about a fortnight before the company was scheduled to give preliminary sales and operating figures. Things were looking so dire that it couldn’t sit on the news any longer. “Company-wide earnings will fall short of market expectations,” Samsung said in a brief regulatory filing.
The company went on to blame its memory and display businesses. Between them, these two product lines account for 43 per cent of revenue. More importantly, Samsung is the world’s biggest supplier of both.
At the heart of Samsung’s warning is the failure of prices to improve.
Dynamic random-access memory, or DRAM, chips – used to improve the performance of devices such as phones, computers and servers – is the crude oil of the tech hardware industry: crucial across the sector, but highly commoditized and subject to supply-demand imbalances. Average contract prices for DRAM fell 20 per cent this quarter and the decline will worsen, market researcher TrendForce Corp. noted late Monday:
The accelerating drop in prices did not stimulate a recovery in demand, and transactions have still been few. DRAM ASP is predicted to continue falling well into the third quarter as inventories clearouts have yet to be completed. (emphasis added)
Flash memory, which stores information as a replacement for traditional hard drives, is so standardized as to become equally vulnerable to the ebb and flow of market forces. It saw similar price drops, though the outlook is more rosy, TrendForce wrote last week. For displays, Samsung pointed to softening demand for flexible OLEDs, which ran headlong into increased capacity for alternative displays as Chinese rivals built more factories.
Weakness in these two categories could indicate problems not just across the industry, but the global economy.
Much of the world’s economic growth in the past decade has been spurred by the tech sector – handheld devices, cloud-based computing, faster communications networks, and cheap money pouring into the VC-funded startup ecosystem. The result is that the world’s four most valuable companies are in tech.
But that wasn’t going to last forever, and already economists and traders are pointing to an inverted yield curve as a sign that the economy is sputtering. As Bloomberg macroeconomics strategist Cameron Crise wrote this week, an inversion of the yield curve – when returns are bigger for short-term debt than longer-term debt – can show an increased probability of recession rather than a simple prediction that it will definitely occur.
I’d argue that Samsung’s warning serves the same function.
If the world’s most dominant player in the two most important technology commodities can’t dodge a sharp and unexpected deterioration then you can bet others will also be struggling. And this is a company that already chose to be far more conservative than rivals on spending this year.
Samsung’s profit warning doesn’t mean a technology recession is here, but it tells us that the odds of a further deterioration are climbing. Investors ought to place their bets accordingly.