Samsung set for record Q2 but likely to miss analyst predictions

It might have the lion’s share of the global smartphone market, and it may be about to announce record profits for Q2, but some financial analysts see signs that Samsung’s star is fading.

The Korean electronics giant released an estimate for the quarter, in which it says it’s likely to have an operating profit of 9.5 trillion won (US$8.33-billion). That’s a record showing and largely comes down to the success of its flagship Galaxy S4 phone and strong sales from its components division. It’s also a massive improvement on Q1’s US$6.4-billion profit and around US$3-billion higher than the same quarter a year ago.

But if things are so great, why are some analysts expressing worry that its smartphone business might have peaked and that it could follow in the footsteps of Apple and other former giants with shrinking margins?

Well in part, it’s because people are unsure about how long it can stay ahead of the curve in an industry where companies live and die on their ability to innovate. There was a time when no one looked like they could even touch Apple, but you only need to look at its stock price over the past few months to see how much investor confidence has shrunk in the Cupertino-based giant.

“I think Samsung has some exciting stuff up its sleeves. The problem is no one is sure whether these products can really wow investors and consumers,” said Jung Sang-jin, a fund manager at Dongbu Asset Management, which owns Samsung shares.

Others meanwhile are worried about how heavily Samsung now relies on its mobile business.

“One of the biggest risks for Samsung Electronics going forward is that 70% of total operating profit comes from mobile business. Diversification is key. Samsung needs to engage in active business transition until end-2014,” Jeff Kim, an analyst at Hyundai Securities told Reuters.

“Samsung’s got diversified businesses. When one business lags, it’s got others outperforming and propping up the overall profit,” Jung at Dongbu said.

“The component business is widely expected to pick up the slack in the second half when smartphones slow, but now worries are also mounting that the component business’ recovery could be short-lived.”

The competition

There are also fears that competitors might start eating into its massive marketshare. It’s fiercest Korean rival LG has made something of a resurgence in recent months and Chinese companies such as Huawei and ZTE, who made their name building cheap Android devices, are now starting to play in the premium section of the market.

“There’s still a big uncertainty about how Samsung will respond to the low-end market,” said Brian Park, an analyst at Tong Yang Securities, referring to its plans to launch a device based on the open-source Tizen operating system.

The future

There are also concerns about how well Samsung will be able to adapt to the future of wearable tech. Both it and Apple are believed to be in the process of producing smart watches, but both will have to convince their audiences that they’ve produced something that smaller players, such as Kickstater darling Pebble, haven’t been able to.

“The (expected launch of) wearable devices won’t be able to replace Samsung’s smartphone business, but it’s more likely to complement its earnings at best,” said Byun Han-joon, an analyst at KB Investment & Securities.

In the meantime however, it seems likely that when the full results are announced on 26 July, Samsung execs won’t be too panicked about what analysts have to say.