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Morningstar | While Memory Demand Is Weaker Than Anticipated, Downside to Samsung’s Share Is Limited

Samsung Electronics has been a fantastic growth story as it established itself as the clear global leader in the smartphone space during the past decade, following its success in becoming the global top manufacturer of flat panel TV in the 2000s. However, we do not identify an economic moat from its consumer electronics business, as these products are mature and difficult to differentiate, and are exposed to the tough competition from Chinese manufacturers. Unlike its competitor Apple, Samsung does not have an ecosystem that prevents users from switching to other brands, in our view.Meanwhile, we believe that Samsung’s semiconductor business will remain the profit driver in the longer term, driven by the robust growth of data traffic. According to Gartner, Samsung led the global semiconductor industry in terms of revenue in 2017, knocking Intel from the top spot for the first time since 1992. Samsung became the top supplier of DRAM in the mid-90s, and now holds 44% market share. The company is also the global top supplier of NAND with 39% market share. Demand growth for memory has been supported by the diffusion of digital devices, such as note PCs and smartphones, over the past two decades. In the coming years, we believe the new telecom standards, such as 5G and LPWA, will not only enable richer content on existing devices, but will also ignite digitalization in non-IT industries, which will continue to drive growth of data traffic. We believe that the big data trend will accelerate from artificial intelligence demand in the future.Owing to technological obstacles, the costs necessary to achieve higher capacity per memory are becoming much higher than the past, which has forced smaller players to withdraw from the market. We believe that Samsung will maintain its cost advantage, which stems from better product mix, underpinned by technical advantages and increased research and development expenses.