Samsung – Puts & Calls A Plenty For Binary Traders

Tech giant Samsung Electronics Co. (005930:KS) is a consumer electronics company that makes consumer goods ranging from smartphones and wearable technology to home appliances and other electronics. The company is based out of South Korea and is a worldwide leader in the consumer technology sector. However, the company has seen troubling times recently over drops in overall sales of smartphones, as well as market saturation. The company’s previous flagship smartphone line, the Galaxy S5, has substantially underperformed expectations with sales underwhelming investors and analysts alike, leading to decreased confidence in the company.

The Fundamental Picture

Despite still being the top seller of phones in the world, Samsung has seen other competitors eat into their market share, with companies like Apple (AAPL:US) and LG (066570:KS) slowly stealing users from the company’s share. In the first quarter of 2015, Samsung lost 7% of its market share year over year. This drop was felt company-wide, with mobile operating profits dropping by 42% for 2014, while overall operating profit margins dropped to 7% in the third quarter of 2014, from 18% the previous year. This came from increased competition, as Apple increased its share by 40% (year over year) while firms like LG and Huawei also eroded Samsung’s market share. This could be attributed to sluggish sales for the company’s Galaxy S5. The company’s then-flagship smartphone model underperformed its previous iteration (the Galaxy S4) in sales by 40%, while company-wide expectations were high for the model (the company even increased production of the phone, which could also have contributed to the slow sales).

Samsung similarly faces an uphill battle in a market that has become highly saturated worldwide. IDC reports that shipments of smartphones will grow by 11.3% this year, a steep drop from the 27.6% the experienced in the previous year. This is mainly attributed to China, where the market for smartphones showed the first signs of contracting in four years with the market shrinking by 8% quarter over quarter. This drop can be seen in Samsung’s earnings for the first quarter of 2015, which saw a 12% drop in overall revenues year over year and collapsing operating profit fall by 29.5%. The company still boasts a relatively solid price-to-earnings ratio of 15.17 (TTM) as shares have slowly been trending higher over the past quarter. Samsung’s earnings per share currently stands at $8.09 (TTM) after experiencing solid 37.56% 1-year return. 

While still recovering from sluggish sales despite the new Galaxy S6’s sales showing a promising start, Samsung has been aggressively seeking new opportunities in the consumer technology sector.  In the smartphone sector, the S6 has been a welcome relief in sales, with the company reporting 6 million units sold by end-April, less than a month after launch. The company has forecasted sales of up to 50 million units by year end, which would establish a new record for the Galaxy S series. This boost in sales has already shown some improvement for the company, with its operating margin improving to 10.6%, the highest it’s been in three quarters.  In spite of this upswing in sales, Samsung has predicted sliding revenues ($43.3 billion, or a -12.4% drop) and operating profits ($5.4 billion, or -30% year over year).

The Technical Take

Samsung shares have been trending lower in an equidistant channel formation since the beginning of April as share prices tumbled on the back of weaker profits and revenues.  Prices are at a critical point on both a short and longer-term timeframe.  On the longer-term view, Samsung shares have been setting up in a head and shoulders bullish pattern with the right shoulder currently setting up.  A break below crucial shoulder support at 1245250 could be a breakdown in that pattern paving the way towards support at 1220200.  A move below this level would confirm the bearish bias and pave the way towards a retest of November lows.  However, should shares begin to recover after sitting at the bottom of the channel, passing resistance at 1306600 it could see Samsung share prices make a run back towards 1510000. 

On a shorter-term basis, share prices are trending below both the 50-day and 200-day moving averages.  However, the 200-day moving average is still trending upward and despite the 50-day turning lower, it has not crossed the 200-day to the downside which would be an overtly bearish indication.  The channel lower also has a bearish bias at present, but shorting at the bottom of the channel is unwise unless predicated on the notion of a downside breakout.  While financials are not great, improved sales and margins might prove an offset for the present woes in prices.  If the present channel is to persist, while not necessarily a case for long positions due to the worsening risk-reward of the downward trending channel.  If playing the case of the head and shoulders pattern, it might be a perfect entry point on the upside, but it has a much different risk-reward than the channel setup.

Conclusion

While the fundamental take has particular bias owing to the company’s shrinking market share, margins, and revenues, the technicals presents an interesting context depending on your short-term and long-term views.  Longer-term, present levels might present a tremendous buying opportunity, especially as sales of the Galaxy S6 soar.  However, should prices break below this crucial level, it paves the way towards renewed downside and approach of November lows.  Overwhelmingly the technicals are indicating lower, but investor confidence will prove the ultimate determinant.