Estimates issued earlier this year suggested Samsung (005930) stood to rake in $13 billion in revenue in 2013 solely through its various component deals with Apple (AAPL), the South Korean company’s biggest customer. Much or even all of that business stands to evaporate over the next few years, however, as the firms’ rivalry over patents spills over into their other dealings. While Samsung stands to lose its biggest parts customer if these patent issues persist, a new report suggests the company won’t take as big a hit as some might assume if it loses Apple’s business.
In a note to investors earlier this week, Bernstein Research analyst Mark Newman determined that Samsung’s downside is minimal if Apple stops using the company’s components for its iPhone and other products. According to his calculations, Samsung would only take a 3% hit in the worst-case scenario. From Newman’s note, as picked up by Barron’s:
We believe there are three scenarios for investors to consider for Samsung’s logic capacity expansion plans, each with significant impact for Samsung, TSMC, Apple and implications for the semiconductor and equipment industry. Currently, Samsung appears to be following the conservative expansion scenario (B2) to avoid the risk of idle capacity in 2014, but depending on how negotiations with Apple go in coming weeks, this may quickly change. We outline two key choices for both Samsung and Apple: Samsung can keep investing full steam ahead assuming 100% of Apple’s demand continues in 2014 and beyond or elects a more conservative expansion approach; and Apple can either renew its 100% volume commitment with Samsung or not. This gives us three key scenarios as outlined in Exhibit 10. – First, Scenario A1 assumes Samsung invests for 100% of Apple and Apple stays with Samsung. In Scenario B1, Samsung keeps investing aggressively but Apple suddenly moves away 50% of its application processor business in 2014, leaving Samsung with potentially some idle capacity to fill in 2014. Finally, in Scenario B2, Samsung invests conservatively assuming that Apple will move away 50% in 2014, and thus Samsung will have a shortage of wafers in 2013 (but full utilization in 2014). For Samsung, Scenario A1 has potential upside, while B1 and B2 downside for Samsung’s System LSI revenue, profit and capex in 2013 and 2014. In the worst case, we see 3% downside to our 2014 EPS, which assumes idle capacity from Apple cannot be filled by other businesses.
Newman sees a 9% upside for TSMC, which is rumored to be taking over much of Apple’s processor manufacturing between now and early 2014.
