The chip industry has been in recession for a long time now. Ever since the first halt of 2018, weak global economy restricted spending by data centre customers, resulting in a struggling chip industry. Manufacturers have had to lower their prices due to rising inventories. The most impact, as anticipated, was felt by the biggest player in the game, Samsung. The Korean electronics conglomerate has seen profits falling by more than 50% every quarter for 2 years. However, this time, the company expects fates to be a little less harsh, as suggested by its Q4 2019 earnings guidance. The company believes that the profit drop will be milder this time around and tough times may be behind us now.
The company expects a profit drop of 34% in operating profit at 7.1 trillion won($6.04 billion) by the end of Q4 2019, as compared to the same time last year in 2018. Refinitiv SmartEstimate estimated the figure to be closer to 6.5 trillion won, which the actual figure beats by 0.6 trillion won. The news fills the company with hope, as they expect chip prices to have finally bottomed out.
The announcement helped Samsung’s share price considerably, as it went up by 2.2% in morning trade today.
What caused this minor peak in the industry?
There are a lot of factors at play here. To start with, the relationship between China and the US is finally loosening up, after both countries had been at each other’s throats for quite some time now. The US initiated a ban on Chinese companies like Huawei to operate in the land. On the other hand, China has announced plans to become self sufficient in both hardware and software technology, cutting off ties with its rival.
Falling inventories and bottoming of chip prices is another reason/indicator that the industry is back to bloom, according to analyst Park Sung-soon at Cape Investment & Securities.
The 5G race between countries and eagerness of manufacturers to provide 5G ready phones to customers also played a huge roll in the grand scheme of things. While large scale commercial 5G roll out is still some time away, there has been a race amongst both manufacturers and countries to cross the finish line first. This has worked in favour of chip makers as demand for 5G ready chips is expected to go up.
Better earnings from smartphones and a rise in the premium smartphone market had companies expecting improvements from weeks. All of this points towards good omen. The chip industry after all, might be bouncing back, after its solid 2 year bloom ended in late 2018.