Samsung Suffers 56% Sales Drop Due To Slump In Chip Demand

FILE PHOTO: The logo of Samsung Electronics is seen at its office building in Seoul, South Korea, July 4, 2017.
(Photo: REUTERS/Kim Hong-Ji/File Photo)

Things are not looking so rosy for Samsung Electronics as the Korean company reported on Wednesday a 56% drop in its operating sales, pestered by low microchip demand in the midst of competition and oversupply.

The company's operating profit was 6.71 trillion won ($5.72 billion) for Q2, in relation to a 6.5 trillion-won projection it posted last week. This report came in just a little over analysts' estimates of 6 trillion won.

The typically recurrent memory-chip business is currently going south, following two years of brisk sales, courtesy of sluggish demand for smartphones in the global market.

Samsung has disclosed that its one-off advances in its display unit, which lists Apple as one of its biggest clients, were included in operating sales. Apple Inc (NASDAQ: AAPL) paid the Korean tech a reimbursement valued at 800 billion-won because the company missed a sales target it set recently, Reuters said.

The ongoing trade friction between Beijing and Washington has affected Samsung Electronic's business of late, which slowed down demand for memory chips, which is one of the main sources of income of Samsung.

Despite the shockwave from the US-China trade dispute, semiconductor stocks are still an attractive investment in the general market this year. The iShares Semiconductor exchange-traded fund, which monitors a range of chip-makers, rallied by as much as 28%, compared to the S&P 500's 18% rise.

On Wednesday, South Korean stocks were down over 1%, notching a new low since the start of the year and dragging down the Korean won, as U.S. President Donald Trump raised new concerns with Chinese leader Xi Jinping on their current economic gridlock.

In a statement, Samsung said the declines in the prices of memory chips were also a result of "persistent inventory adjustments by large data center clients during the last quarter, despite few slight increases in demand."

The company also disclosed that its semiconductor division recorded an operating profit of 3.4 trillion won for the latest quarter, which fell nearly 70% from the previous year. For the first 6 months of 2019, it expects "demand to grow though the Company anticipates volatility in the industry because of rising external uncertainties."

Semiconductor companies around the world are experiencing a period of inventory and share adjustment that is causing market demand to drop and creating a glut in overall supplies. Analysts expect this trend to improve in the first quarter of 2020.

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