Samsung, Together With How To Brand Coin Without A Crystal Ball
March 05, 2018
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It is pop inward markets to brand definitive predictions virtually the future, as well as and then seat one's portfolio to gain goodness should those predictions come upwards to fruition. Superficially, this approach seems to brand sense - subsequently all, hereafter outcomes volition hold out dictated yesteryear hereafter events, as well as therefore for sure yous should attempt to predict what is going to happen, because what happens volition drive hereafter outcomes.
The employment is that the basis is infinitely complex, as well as whatever 1 person's sentence virtually what volition hap inward the future, derived from an array of mental models applied to the electrical flow situation, volition inevitably essay to hold out an excessively simplistic thought of reality that is prone to error.
A much improve approach, inward my view, is to admit this inherently irreducible uncertainty, as well as instead think probabilistically as well as attempt to discovery situations where prospective payoffs are asymmetric inward nature - heads I win; as well as tails I don't lose really much. If yous tin laissez passer the axe discovery bets similar that, yous gain non involve to predict whether a heads or a tails volition hold out flipped. You only involve to know that the probabilities - given the payoffs on offering - are favourable.
Core to this procedure is considering inward advance what is probable to hap if yous are wrong. This is likewise seldom done yesteryear hubristic marketplace participants who - spell smart as well as insightful - often accept excessive degrees of confidence inward their mightiness to predict the future. They confidently predict that the money volition toss heads, as well as disregard what volition hap if it genuinely ends upwards tossing tails.
An illustration of the incorrect agency to gain it is what Kyle Bass has done inward recent years. In early on 2016, he confidently declared that mainland People's Republic of China had experienced credit as well as existent estate bubbles (something I somewhat deal with), as well as was accordingly imminently virtually to sense a banking as well as currency crisis (something I thought as a possible outcome, but non that likely, for reasons I may verbalise over inward a hereafter spider web log article, nor a argue to sell all 'risk assets').
"This is going to hap inward the adjacent 12-18 months", he declared with absolute assurance. As a result, he sold all his run a endangerment assets as well as positioned his fund for that outcome, as well as that outcome alone. If heads is seemingly 100% assured, why worry virtually what volition hap if yous flip tails? Go all in. The employment was non therefore much his reasoning (although at that spot were issues with that as well), but the fact that he did non consider what the consequences would hold out if he was wrong. As a result, he has sat out a huge 24 calendar month rally inward global markets, as well as missed some of the best buying opportunities offered this wheel (there were extraordinary bargains available inward early on 2016 on concern human relationship of mainland People's Republic of China fears).
An illustration of a improve approach is to consider the shares of Samsung at present, as well as inward particular, the preferred class, which merchandise at an guess 15% discount to the ordinary shares (despite having slightly superior economical rights). At the preferred price, Samsung is trading at around 6x electrical flow earnings, as well as virtually 4.5x earnings excluding its tremendous 70tr won cyberspace cash hoard.
The argue it is trading therefore inexpensive - aside from the fact that South Korean stocks are relatively inexpensive overall - is that two-thirds of its earnings currently come upwards from semiconductor components/memory (DRAM as well as NAND), which accept experienced a surge inward pricing over the yesteryear 18-24 months, as well as accept driven an guess doubling inward Samsung's earnings. Forget smartphones - retentivity profits are Samsung's telephone substitution profits driver at present. Historically, semiconductor prices accept been extremely cyclical, as well as the marketplace is sceptical earnings volition hold out sustained at electrical flow levels. It is believed capacity increases volition speedily follow, as has historically been the case, which are probable to drive an as pregnant spend upwards inward retentivity prices over the adjacent few years, probable halving Samsung's earnings.
There are ii sides of the fighting to hold out had here. On the bearish side, 1 tin laissez passer the axe indicate to the historical designing of repeated boom-bust cycles inward retentivity prices, as well as the fact that prices are currently at elevated levels (with cost increases having already sharply slowed), as well as manufacture heavyweights are increasing capex to boost supply. An declaration was also made dorsum inward 2015 that manufacture consolidation was probable to resultant inward improved manufacture profitability as well as reduced cyclicality, but that proved a simulated dawn, as retentivity prices collapsed into early on 2016, taking downward the part prices of producers amongst these dashed hopes. Markets accept remembered, as well as accept non been willing to extrapolate electrical flow manufacture super-profits ('fool me once, shame on you, fool me twice...).
One the to a greater extent than bullish side, however, consider the views of Dominicus Microsystem co-founder Bill Joy, who joined Water Street Capital a few years ago, as well as convinced them to non only unopen their Micron brusk (Micron is some other major retentivity producer, that currently trades at 4-5x PE), which was premised on the to a higher house comport thesis, but also to instruct heavily long. His declaration is something to the effect that (1) Moore's 'Law' is starting to intermission down, as the mightiness to increment transistor density has begun to attain its physical limits; this volition brand increasing furnish to a greater extent than difficult/costly/time-consuming inward the future; (2) need is accelerating, due to a rapid measuring of cloud information middle buildouts as well as smartphone/device adoption, as good as diverse IoT trends; as well as (3) the global retentivity marketplace has consolidated downward to a few players, which may instill greater supply-side discipline.
He believes that the combination of #1-2, inward particular, may hateful that retentivity prices remain 'stronger for longer' as producers struggle to maintain measuring with growing need for many years, potentially resulting inward a sustained menses of robust profitability for manufacture incumbents, whereas #3 may also grade a to a greater extent than permanent shift away from the temporary booms as well as rapid cyclical busts of yesteryear when furnish eventually does grab upwards with demand. If he is right, high levels of profitability (and profits growth) may hold out sustained yesteryear the manufacture for many years from here. It would hold out a high-growth, high-profitability manufacture trading at 4x earnings.
Who is right? I accept no idea. I'm non going to attempt as well as accept improve insights into the decay of Moore's Law as well as the possible structural implications on manufacture need as well as furnish dynamics than 1 of the co-founders of Dominicus Microsystems. However, it is also hard to completely dismiss the industry's long history of cyclicality, given the commoditised nature of retentivity components, coupled with the fact that need as well as is at a relatively high ebb at introduce (given rapid cloud server buildouts). I'm agnostic, but am inclined to believe the reality is in all likelihood somewhere inward betwixt the ii extremes (i.e. that retentivity prices remain higher than the bears currently believe for longer, but gain eventually hateful revert several years out, as well as sense some other precipitous cyclical downturn at some point).
The beauty of the province of affairs with Samsung, however, is that yous gain non involve to know the answer, because at it's electrical flow price, the marketplace is already pricing inward the mean-reversionary scenario with Kyle Bass-esque certitude. If retentivity prices collapse inward the adjacent few years, Samsung's earnings volition probable around halve, pricing the preferred stock on virtually 9x earnings ex-cash - a valuation that is silent far from expensive - peculiarly given the company's improving upper-case missive of the alphabet resources allotment (the companionship is similar a shot returning around 50% of its annual FCF inward the shape of dividends as well as buybacks), as well as inward the meantime, they volition maintain to brand boatloads of money. However, if Joy is right, Samsung volition essay much much likewise cheap, as well as volition hold out able to purchase dorsum boatloads of stock at extremely high earnings yields. Samsung is an like shooting fish in a barrel double (at least) over the adjacent yoke of years if retentivity prices essay resilient as well as markets warm to Joy's view.
Heads yous win; tails yous don't lose really much (although it is silent probable Samsung's part cost volition autumn inward the brusk term if intelligence emerges that retentivity prices are rolling over). I similar these odds. I currently accept a 1.6% seat inward Samsung Preferred GDRs (SMSD LI).*
LT3000
*I also ain a pocket-size 10bp seat inward Micron, acquired late at $41 (about a 4x PE of its electrical flow earnings run-rate), but I much prefer Samsung, as it was silent making loads of money at the recent trough of the retentivity cycle, whereas Micron was unprofitable. Micron also has some debt, whereas Samsung is inward a pregnant cyberspace cash position.
Samsung trailing 12-month EPS - silent highly profitable at cyclical retentivity cost lows, due to its smartphone as well as other businesses
Micron 10yr trailing 12-month EPS - loss making at historical cyclical retentivity cost lows
The employment is that the basis is infinitely complex, as well as whatever 1 person's sentence virtually what volition hap inward the future, derived from an array of mental models applied to the electrical flow situation, volition inevitably essay to hold out an excessively simplistic thought of reality that is prone to error.
A much improve approach, inward my view, is to admit this inherently irreducible uncertainty, as well as instead think probabilistically as well as attempt to discovery situations where prospective payoffs are asymmetric inward nature - heads I win; as well as tails I don't lose really much. If yous tin laissez passer the axe discovery bets similar that, yous gain non involve to predict whether a heads or a tails volition hold out flipped. You only involve to know that the probabilities - given the payoffs on offering - are favourable.
Core to this procedure is considering inward advance what is probable to hap if yous are wrong. This is likewise seldom done yesteryear hubristic marketplace participants who - spell smart as well as insightful - often accept excessive degrees of confidence inward their mightiness to predict the future. They confidently predict that the money volition toss heads, as well as disregard what volition hap if it genuinely ends upwards tossing tails.
An illustration of the incorrect agency to gain it is what Kyle Bass has done inward recent years. In early on 2016, he confidently declared that mainland People's Republic of China had experienced credit as well as existent estate bubbles (something I somewhat deal with), as well as was accordingly imminently virtually to sense a banking as well as currency crisis (something I thought as a possible outcome, but non that likely, for reasons I may verbalise over inward a hereafter spider web log article, nor a argue to sell all 'risk assets').
"This is going to hap inward the adjacent 12-18 months", he declared with absolute assurance. As a result, he sold all his run a endangerment assets as well as positioned his fund for that outcome, as well as that outcome alone. If heads is seemingly 100% assured, why worry virtually what volition hap if yous flip tails? Go all in. The employment was non therefore much his reasoning (although at that spot were issues with that as well), but the fact that he did non consider what the consequences would hold out if he was wrong. As a result, he has sat out a huge 24 calendar month rally inward global markets, as well as missed some of the best buying opportunities offered this wheel (there were extraordinary bargains available inward early on 2016 on concern human relationship of mainland People's Republic of China fears).
An illustration of a improve approach is to consider the shares of Samsung at present, as well as inward particular, the preferred class, which merchandise at an guess 15% discount to the ordinary shares (despite having slightly superior economical rights). At the preferred price, Samsung is trading at around 6x electrical flow earnings, as well as virtually 4.5x earnings excluding its tremendous 70tr won cyberspace cash hoard.
The argue it is trading therefore inexpensive - aside from the fact that South Korean stocks are relatively inexpensive overall - is that two-thirds of its earnings currently come upwards from semiconductor components/memory (DRAM as well as NAND), which accept experienced a surge inward pricing over the yesteryear 18-24 months, as well as accept driven an guess doubling inward Samsung's earnings. Forget smartphones - retentivity profits are Samsung's telephone substitution profits driver at present. Historically, semiconductor prices accept been extremely cyclical, as well as the marketplace is sceptical earnings volition hold out sustained at electrical flow levels. It is believed capacity increases volition speedily follow, as has historically been the case, which are probable to drive an as pregnant spend upwards inward retentivity prices over the adjacent few years, probable halving Samsung's earnings.
There are ii sides of the fighting to hold out had here. On the bearish side, 1 tin laissez passer the axe indicate to the historical designing of repeated boom-bust cycles inward retentivity prices, as well as the fact that prices are currently at elevated levels (with cost increases having already sharply slowed), as well as manufacture heavyweights are increasing capex to boost supply. An declaration was also made dorsum inward 2015 that manufacture consolidation was probable to resultant inward improved manufacture profitability as well as reduced cyclicality, but that proved a simulated dawn, as retentivity prices collapsed into early on 2016, taking downward the part prices of producers amongst these dashed hopes. Markets accept remembered, as well as accept non been willing to extrapolate electrical flow manufacture super-profits ('fool me once, shame on you, fool me twice...).
One the to a greater extent than bullish side, however, consider the views of Dominicus Microsystem co-founder Bill Joy, who joined Water Street Capital a few years ago, as well as convinced them to non only unopen their Micron brusk (Micron is some other major retentivity producer, that currently trades at 4-5x PE), which was premised on the to a higher house comport thesis, but also to instruct heavily long. His declaration is something to the effect that (1) Moore's 'Law' is starting to intermission down, as the mightiness to increment transistor density has begun to attain its physical limits; this volition brand increasing furnish to a greater extent than difficult/costly/time-consuming inward the future; (2) need is accelerating, due to a rapid measuring of cloud information middle buildouts as well as smartphone/device adoption, as good as diverse IoT trends; as well as (3) the global retentivity marketplace has consolidated downward to a few players, which may instill greater supply-side discipline.
He believes that the combination of #1-2, inward particular, may hateful that retentivity prices remain 'stronger for longer' as producers struggle to maintain measuring with growing need for many years, potentially resulting inward a sustained menses of robust profitability for manufacture incumbents, whereas #3 may also grade a to a greater extent than permanent shift away from the temporary booms as well as rapid cyclical busts of yesteryear when furnish eventually does grab upwards with demand. If he is right, high levels of profitability (and profits growth) may hold out sustained yesteryear the manufacture for many years from here. It would hold out a high-growth, high-profitability manufacture trading at 4x earnings.
Who is right? I accept no idea. I'm non going to attempt as well as accept improve insights into the decay of Moore's Law as well as the possible structural implications on manufacture need as well as furnish dynamics than 1 of the co-founders of Dominicus Microsystems. However, it is also hard to completely dismiss the industry's long history of cyclicality, given the commoditised nature of retentivity components, coupled with the fact that need as well as is at a relatively high ebb at introduce (given rapid cloud server buildouts). I'm agnostic, but am inclined to believe the reality is in all likelihood somewhere inward betwixt the ii extremes (i.e. that retentivity prices remain higher than the bears currently believe for longer, but gain eventually hateful revert several years out, as well as sense some other precipitous cyclical downturn at some point).
The beauty of the province of affairs with Samsung, however, is that yous gain non involve to know the answer, because at it's electrical flow price, the marketplace is already pricing inward the mean-reversionary scenario with Kyle Bass-esque certitude. If retentivity prices collapse inward the adjacent few years, Samsung's earnings volition probable around halve, pricing the preferred stock on virtually 9x earnings ex-cash - a valuation that is silent far from expensive - peculiarly given the company's improving upper-case missive of the alphabet resources allotment (the companionship is similar a shot returning around 50% of its annual FCF inward the shape of dividends as well as buybacks), as well as inward the meantime, they volition maintain to brand boatloads of money. However, if Joy is right, Samsung volition essay much much likewise cheap, as well as volition hold out able to purchase dorsum boatloads of stock at extremely high earnings yields. Samsung is an like shooting fish in a barrel double (at least) over the adjacent yoke of years if retentivity prices essay resilient as well as markets warm to Joy's view.
Heads yous win; tails yous don't lose really much (although it is silent probable Samsung's part cost volition autumn inward the brusk term if intelligence emerges that retentivity prices are rolling over). I similar these odds. I currently accept a 1.6% seat inward Samsung Preferred GDRs (SMSD LI).*
LT3000
*I also ain a pocket-size 10bp seat inward Micron, acquired late at $41 (about a 4x PE of its electrical flow earnings run-rate), but I much prefer Samsung, as it was silent making loads of money at the recent trough of the retentivity cycle, whereas Micron was unprofitable. Micron also has some debt, whereas Samsung is inward a pregnant cyberspace cash position.
Samsung trailing 12-month EPS - silent highly profitable at cyclical retentivity cost lows, due to its smartphone as well as other businesses
Micron 10yr trailing 12-month EPS - loss making at historical cyclical retentivity cost lows
