Samsung Electronics Co. Ltd. Performing Better than the Galaxy”Bonfire” Suggests
Fans of the “iPhone” and Apple Inc. (NASDAQ:AAPL) are having a good laugh. After the latest “Galaxy Note 7” battery explosions, its maker Samsung Electronics Co. Ltd. (NASDAQ:SSNLF) has announced it would cease all further production of this smartphone, perhaps the iPhone’s biggest contender.
Now, after this kind of embarrassment, you would think that Samsung stock would have crashed in a bigger ball of fire than its Molotov-style incendiary phone.
It turns out that, while pyromaniacs might be the only people left on the planet coveting a Galaxy Note 7, Samsung stock is doing better than anyone could imagine. SSNLF stock gained some five percent on October 13, trading at $1,425.00 per share. So it’s still well within its all-time high territory. Indeed, while phones represent a major portion of Samsung’s revenues and earnings—over 50%—the company has performed well in 2016.
SSNLF stock is trading some 32% higher year-to-date, and analysts have appreciated the company’s latest earnings release. While “Android” phones account for over 87% of the market, Samsung still plays a dominant role within that market.
All indications are that Samsung will recover from this problem, probably stronger than ever. Samsung experienced a full meltdown on October 11 as it announced a literal blackout of its production. Samsung stock lost eight percent that day. But it has already started to bounce back.
Samsung Stock Is Trading Better than the Company’s Embarrassment Suggests
No doubt, the Galaxy Note 7 problem is an embarrassment for Samsung. It will have an impact on the company’s bottom line, which the forthcoming earnings report (October 29) will corroborate. It has already cut its forecast by a third. (Source: “Samsung reduces Q3 earnings forecast by a third,” GSMArena, October 12, 2016.)
But Samsung is more than just phones. It leads the electronic component industry—memory chips and displays—which will help balance mobile division losses.
If that’s not enough to convince you, Samsung stock has plenty of upside left: check your TV monitor. There’s a good chance it’s a Samsung. That said, Apple stock will gain as the Galaxy Note 7 is out of contention. The Korean company had no choice but to recall all phones and cease production. Why should Samsung have risked more?
Keeping the offending phones on the market would only have hurt Samsung shareholders. The company has taken the hit now, while it’s still manageable, rather than later, when it could have caused a debacle. This week, and maybe over the next few months, Samsung will be the subject of campfire jokes, but stopping production was the only way to find a bottom for Samsung stock.
The Recall Was the Best Way to Save Samsung Stock
Prolonging the Galaxy Note 7 agony would have meant risking long-term failure to Samsung’s reputation and sending the brand’s image up in smoke. The company already faces legal action. Some U.S. consumers have claimed the inevitable damages from defective smartphones. The South Korean group registered in the United States 92 cases of batteries overheating inside aircraft, including 26 that caused burns and 55 that caused property damage. (Source: “Samsung Galaxy Note 7 price, specs, features: Samsung predicts losses of $5.3 billion by 2017,” ITPro, October 14, 2016.)
Now, having bitten the bullet, Samsung can focus on fixing the problem, perhaps coming up with an entirely new battery type in the process.
There are more significant examples of batteries causing product recalls or, rather, groundings. Boeing Co (NYSE:BA) experienced battery fires with its “787 Dreamliner.” After several production delays and finally delivering the first airliners to the launch customer, the company had to demand a halt to all flights. It found a solution, and the better battery will enable faster development of future airliners.
Samsung might be down now, but SSNLF stock prices should rise once again.