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Samsung Follows Apple's Lead in Issuing Bad Quarterly Guidance

Nicholas Rossolillo, The Motley Fool

It isn't just the iPhone that's hurting these days. After Apple (NASDAQ: AAPL) provided a weaker-than-anticipated first-quarter fiscal 2019 update (for the three months ending December 29, 2018), Samsung (NASDAQOTH: SSNLF) followed suit with a downgrade of its own. It's proof that global economic growth has tapped the brakes, but there's a silver lining to be found here.

What's up, Samsung?

Samsung may be best known for the Galaxy smartphone, but the South Korean giant is a diversified tech manufacturer of everything from appliances to TV display panels to semiconductors. That gives Samsung a lot of levers to pull to drive growth, but manufacturing nevertheless has its ups and downs. As far as Samsung's operations are concerned, manufacturing has been down as of late. 

The iPhone XS Max displayed in black.

The iPhone XS Max. Image source: Apple.

The company has grown in the last year as overall demand for consumer electronics has increased, but its smartphone and semiconductor segments took a turn for the worse in the fourth quarter of 2018. Samsung said it now expects total sales and operating profit to come in at 59 trillion and 10.8 trillion Korean won, respectively ($52.8 billion and $9.7 billion per exchange rates as of this writing). That's a sharp slowdown from the 66.0 trillion and 15.2 trillion won in sales and operating profit during the fourth quarter a year ago.

While Apple's lowered outlook caught some investors off guard, Samsung's downturn is less surprising. The company's smartphone segment has been losing global market share to Apple at the premium end of the spectrum, as well as to cheaper phone models made by the likes of China's Huawei on the value-device side. Plus, the memory semiconductor industry has been in a slowdown since the summer of 2018, and some of Samsung's peers like Micron (NASDAQ: MU) have recently indicated an all-out downturn is in the works until at least the middle of 2019.

An artist's illustration of data being shared around the globe.

Image source: Getty Images.

The upshot for tech investors

Tech manufacturing outfits could be headed for a slump for at least the next couple of quarters as a result of sluggish smartphone shipments and a near-term cool-off for projects that make liberal use of parts like memory chips. It's difficult to say how long it will last, but indications from other manufacturers (like Micron and other semiconductor makers) point to a rebound during the back half of 2019.

Samsung has said as much, too. During its third-quarter 2018 results, the company said it expects overall growth to continue into 2019 from an eventual pickup in the smartphone industry, continued expansion of ultra-high-definition TV sales, and strong demand for data center upgrades by year end. In short, long-term tailwinds still favor the expansion of the global technology sector.

For investors looking to capitalize on an eventual rebound, Samsung isn't the best pick. Apple still has enough going for it that it could turn in a bottom-line increase in its next quarter, while that appears to be out of the question for Samsung at the moment. Apple is also successfully making aggressive moves into high-profit margin software services to complement device sales.

In short, Samsung following Apple's lead in issuing soft guidance is bad news in the short term, but volatility is the name of the game for manufacturing companies. The long-term reason for investing in tech is nevertheless still intact, making the recent downturn a buying opportunity.

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Nicholas Rossolillo and his clients own shares of Apple and Micron Technology. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.