hankyoreh

Attendees of the 23rd Semiconductor Exhibition held at COEX in Seoul’s Samsung neighborhood on Oct. 27, 2021, peruse Samsung Electronics’ booth. (Yonhap News)

Share prices for Samsung Electronics, the bellwether of the South Korean stock market, passed the 90,000-won mark back on Jan. 11, 2021.

This was a leap of 53% from the 59,500-won closing price recorded a year earlier on Jan. 10, 2020. The dawn of the “90,000-won era” for Samsung Electronics was boosted by individual buyers, who snapped up 1.7 trillion won (US$1.4 billion) in shares that had been dropped by institutional and foreign investors. It was an unprecedented buying trend.

The same day, securities companies unanimously raised their target share prices for Samsung Electronics Co. Ltd. “Still cheap! Heading for 120,000 won,” read the title of an article in one news outlet at the time. The stock market was filled with rosy predictions that share prices exceeding 100,000 won were imminent.

The very next day, winter struck.

Stock prices began falling again, sliding from 90,000 won on Jan. 13 to less than 80,000 won four months later on May 13. By October, they were down below 70,000 won — one-third of the peak level having gone up in smoke.

It’s only when we get stung by stocks that we come to see what sort of place a company is. During the first half of 2021, Samsung Electronics registered 129 trillion won in sales, with 40% of that coming from its smartphone wing. Another 32% came from semiconductors, 20% from appliances and 11% from displays.

Operating profits were 22 trillion won. Ten trillion of that, or 47%, came from its semiconductor wing. Eight trillion won, or about one-third, came from smartphone sales.

Samsung Electronics is the globally rare example of a comprehensive, vertically integrated semiconductor company, performing everything from semiconductor design and production to smartphone, appliance and laptop manufacturing. That much is common knowledge to South Koreans.

But few people know that just five years ago, market investors saw Apple in the US and the Taiwan Semiconductor Manufacturing Company (TSMC) as having similar future growth potential to Samsung Electronics. While Samsung has fallen back to earth without ever clearing the 100,000-won share price mark, those global businesses now boast far higher share prices.

The attitude among global investors can be seen in the price-to-earnings ratio (PER).

In simple terms, the PER represents a company’s market capitalization divided by its current net income. The same result can be obtained by dividing the share price by the net profits per share.

When that ratio is high, it means either that the current share price is too high relative to the company’s earnings or that investors predict the company’s profits will substantially increase in the future.

As of 2016, Samsung Electronics’ PER was 13.2 — slightly higher than TSMC’s 12.3 and roughly on par with Apple’s 13.1.

But over the next four years, the situation shifted. In 2020, Samsung Electronics’ PER reached 21.1. Meanwhile, TSMC and Apple’s PERs were far higher at 31.7 and 35.8, respectively. This means that the rise in the companies’ share prices was noticeably higher than the increase in their profits.

One reason for this discrepancy may simply be that the companies are all listed in different markets. Samsung Electronics is listed on Korea’s KOSPI, Apple on Nasdaq, and TSMC on the Taiwanese stock market. TSMC American depositary receipts (ADRs) are also traded on the New York Stock Exchange. The respective markets differ markedly in scale.

But it should also be noted that a company’s share prices essentially reflect anticipated rises in sales and profits. Also, the fact that the companies are listed in different markets doesn’t make a large difference in terms of investor access.

What that means is that investors ultimately see Samsung Electronics as having less growth potential than Apple or TSMC.

In the past, Apple and Samsung Electronics existed in a symbiotic relationship. When Steve Jobs signaled Apple’s resurgence in 2005 with the new portable music player known as the iPod Nano, the devices included thin and inexpensive NAND flash semiconductors made by Samsung Electronics.

Meanwhile, it was business from Apple that helped propel Samsung Electronics past Japanese competitor Toshiba. When Apple released the iPhone in 2007, it commissioned Samsung Electronics to produce the application processor.

This is widely recognized as the moment that set the stage for the growth of Samsung Electronics’ semiconductor foundry production, along with the eventual launch of the Galaxy smartphone. The two companies’ paths would later diverge as Samsung Electronics’ smartphone sector experienced rapid growth.

What has allowed Apple to maintain an advantage over Samsung Electronics has been the former’s insular, vertically integrated ecosystem.

In the case of the iPhone, which has driven Apple’s growth to date, advancements have effectively stalled since 2015. Instead, it has parlayed its independently developed semiconductor chips, operating systems (including iOS), and platforms (including its app store) to keep consumers locked into its mobile devices, continuing to shell out.

This helps to explain the big business done by new devices compatible with previous ones, such as the Apple Watch, and the rapid rise in sales for Apple’s online services. Investors are placing their bets on Apple’s potential to transform from a manufacturing company into a mobile empire.

TSMC has enjoyed growth in partnership with Apple ever since the latter parted ways with Samsung. Indeed, this has been the company’s advantage: securing massive capital, the production capabilities that it shores up, and major accounts.

When TSMC first presented its business model of making other companies’ semiconductors for them, few could have predicted its current success. Because when Samsung Electronics was in a price war with Japanese rivals in the memory semiconductor market, it opted for a strategy of stability.

The reasons TSMC’s strategy worked out had to do with the growth of global fabless businesses — which design semiconductors without possessing semiconductor manufacturing facilities — and a steep rise in independent chip demand by Big Tech companies.

Its motto was “We do not compete with our customers.” It attracted numerous accounts among companies uncomfortable doing business with Intel or Samsung Electronics, showing that even an outsourcing company could become a top player in an age when the semiconductor industry was defined by its division of labor.

Indeed, TSMC’s operating profits climbed from a level amounting to just 44% of Samsung Electronics’ in late 2015 to nearly 64% as of late 2020. Its high share prices reflect the market’s expectation that its profits will soon catch up with — and even surpass — those of Samsung Electronics.

In its semiconductor and mobile businesses to date, Samsung Electronics has adopted the “all-rounder” strategy of doing well in every area. Indeed, its success with this approach has been unprecedented.

But the secret toward moving past the 90,000-won share price mark and into the six-digit era lies in the possibilities that open up when it adopts a clear specialization, rather than being simply good at everything.

Currently, Samsung holds 130 trillion won in cash. The answer it comes up with will be apparent from the direction the money flows.

By Chan-ho, CPA

Please direct questions or comments to [english@hani.co.kr]