South Korean technology powerhouse Samsung Electronics Co <005930.KS> posted a fourth straight record quarterly profit - of $7.4 billion - with strong sales of its Galaxy range of phones masking sharply lower memory chip sales.
The record run, though, is likely to end in December, with profit growth slowing even more next year as TV markets stagnate and growth in the high-end smartphone market eases from the recent breakneck speed. Profit is expected to grow 16 percent next year down from a forecast 73 percent this year, according to Thomson Reuters I/B/E/S.
"The biggest concern for Samsung is that its smartphone growth momentum will slow. It'll be difficult for Samsung to maintain such a high profit margin from handsets as the market gets crowded and competition will intensify," said Nam Dae-jong, analyst at Hana Daetoo Securities.
Samsung said July-September operating profit almost doubled from a year ago to 8.12 trillion won, in line with its earlier estimate.
Reporting its results just hours after main rival Apple Inc , Samsung did not detail its third-quarter smartphone shipments, though these are estimated to have soared to 58 million. Apple, which launched its latest iPhone 5 on September 21, said it shipped 26.9 million iPhones in July-September.
Next big thing
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While Samsung outsells Apple in gadgets, the Korean group's market value is just a third of the U.S. firm's $578 billion, and investors question whether Samsung can narrow that gap at a time when the stellar handset business is set to lose steam and Apple, also its biggest customer, looks to spread its supplier base wider.
"Samsung has a lot of strong businesses like tablets, OLED TVs and micro-processor chips that could become its next big thing and step it up to the next level," Lee Sun-tae, analyst at NH Investment & Securities, said ahead of the earnings. "But these aren't fully ready to become a real earnings driver like the Galaxy."
Illustrating the might of Samsung's handset business, third-quarter profits from the mobile division more than doubled to 5.63 trillion won, as sales of the Galaxy S III, introduced in late May, powered ahead of the iPhone 5 launch. Samsung is estimated to have shipped 18-20 million S IIIs in July-September. The mobile business generated 69 percent of total quarterly profit.
But strong sales of Apple devices - iPhones, iPads and iPods - also help the Korean group, which makes chips, micro-processors and flat screens for the popular gadgets.
Still Samsung shares trade more cheaply - at 7.5 times next year's estimated earnings versus Apple's 11.6 times - as its broader business portfolio, including thin-margin washing machines and fridges, makes it more vulnerable to weak consumer spending. Shares in Samsung have climbed 24 percent so far this year, easily outpacing the benchmark KOSPI's <.KS11> 5 percent gain, but only half the gains made by Apple.
The stock traded down 1.3 percent in Seoul early on Friday.
"It will take time for Samsung to narrow the gap with Apple in tablets. Its Galaxy Tab tablet PCs aren't sexy enough to outsell Apple's iPad," said NH Investment's Lee. "There are concerns Samsung's earnings would peak this year. There's little room for its mobile business to make more money, while there's a limited upside in chips and displays."
New drivers
Samsung is now looking to a new range of mobile products, such as its Ativ tablets using Microsoft's new Windows operating system, to propel growth. It is also seeking new clients for its screens and chips as Apple peels away to other suppliers.
Samsung has stopped supplying displays for the iPhone, and has a reduced role in the iPad panel - down to 26 percent this quarter from 38 percent a year ago, according to DisplaySearch. Apple is buying fewer memory chips from Samsung for the iPhone 5, relying more on SK Hynix Inc <000660.KS> and Elpida Memory.
Bernstein analysts reckon Apple will also gradually phase out Samsung as the main supplier of the mobile micro-processor, used to power the iPhone and iPad, and shift to rival supplier TSMC <2330.TW>, starting late next year.
"In the worst 'thermonuclear warfare' case, we size this risk at up to 20 percent of 2013 earnings per share ... This worst case assumes Samsung is caught by surprise and is unable to fill its fabs and hence suffers significant idle costs," a recent Bernstein note said.
Chips are down
Third-quarter profit at Samsung's chip division, which competes against Toshiba Corp <6502.T> and SK Hynix, dropped 28 percent to 1.15 trillion won as prices of dynamic random access memory (DRAM) chips sagged, though a recovery in NAND flash chips, widely used in mobile devices, helped offset the weakness.
The company said on Friday it expected DRAM oversupply to run on into the current quarter, but sees a tight NAND flash memory market.
Samsung competes against Sony Corp <6758.T> and LG Electronics Inc <066570.KS> in televisions, and LG Display <034220.KS> in screens.
The good news for Samsung is that more electronics vendors are reshuffling their products to make more tablets and slim ultrabooks, which consume expensive flat-screens, more sophisticated packaged chips and memory chips.
"That key component market is getting tighter, thanks to the mobile boom. There are now lots of IT companies producing tablets and ultrabooks. This will restore the component supply imbalance, which has been extremely skewed to Apple due to its huge bargaining power," Kim Sung-in, an analyst at Kiwoom Securities, said ahead of the earnings release.