There’s a new member of the trillion-dollar club for listed companies. Its valuation looks questionable. But to my mind, it represents outstanding value and has the potential to make investors a solid return. Suffice to say, I’m not talking about SpaceX.
With all the coverage about Elon Musk’s SpaceX IPO and its intergalactic valuation, you could be forgiven for not noticing Samsung quietly entering the club through a side door a few weeks ago.
It has risen strongly on the back of the surge in semiconductor earnings and now joins an exclusive group of 13 other companies, which includes Apple, Alphabet, Amazon, Broadcom, Berkshire Hathaway, Eli Lilly, Meta, Microsoft, Nvidia, TSMC, Saudi Aramco, Tesla and – another recent entrant – South Korean chip maker SK Hynix.
What is interesting about Samsung is that the South Korean giant trades at just six times expected earnings. Yes, you read that correctly. The average trillion-dollar company, excluding Samsung, SK Hynix and Tesla, is priced at 24x forward earnings. Tesla trades on an astronomical 208x valuation, skewing the average significantly. SK Hynix is similarly priced to Samsung but there’s a cheaper way to get it that we’ll come to later.
In the jargon of the industry, this means that Samsung is on a forward price/earnings (P/E) ratio of six versus 24. In theory, Samsung shares could rise fourfold without the company lifting earnings expectations and it would still not look out of place against its global trillion-dollar company peers.
It also boasts the second-highest (after Nvidia) net income in the trillion-dollar peer group. Strong earnings momentum, combined with a low valuation, continues to make Samsung the largest position in the Artemis SmartGARP Global Emerging Markets fund.
In the first quarter of the year, its revenue spiked up to $91.5bn, compared with $11.4bn a year earlier. Its operating profit was $39bn this year, versus $4.5bn in the same quarter last year.
This was a quarterly sales record, driven by its Device Solutions division – that’s the division that manufactures memory chips, processors and display panels. The huge demand from AI for semiconductors has led to a global shortage and enabled Samsung to hike its prices.
This demand doesn’t look like it will wane soon and the company is progressing with its memory chip development programme to maintain its strong position. Modern large language AI models require incredibly fast memory to keep the AI processors (GPUs) running smoothly without data bottlenecks.
Samsung’s new HBM4E chip is cutting-edge memory technology that will sit alongside Nvidia GPUs and should help reduce heat resistance and improve energy efficiency.
Of course, Samsung is about more than just chips. Most of us know the company for its TVs and mobile phones. The profit margins on display panels and mobile phones aren’t as impressive – 6% for panels, 7.3% for phones – but these continue to contribute significantly to overall profits.
The company isn’t resting on its semiconductor laurels. It’s focused on driving down costs and raising its sights higher in terms of output, concentrating on higher-margin, higher-end products like large display screens and foldable phones.
It benefits not just from its own production of chips to power AI but also from the way AI can be incorporated into its consumer technology products to enhance its offering and maintain a competitive advantage.
A sceptic might argue that its 140% share price rise this year is primarily about semiconductors and this is a story that may not have legs forever. On these grounds, the valuation of Samsung looks attractive but not ridiculously cheap.
I wouldn’t disagree. But I would argue that if the same degree of scepticism were applied to all technology stocks – and certainly to most of the trillion-dollar club members – valuations elsewhere might look very different.
Follow the index or be selective?
Market concentration in the S&P 500 amid the surge of mega-cap technology stocks is widely recognised. Historically, the top 10 stocks have represented around 20% of the index. Today it’s almost twice that.
We see a similar trend within emerging markets (EMs). EMs have outperformed developed markets this year – up over 25% to the end of May, versus 10.7% for the MSCI World index. But index returns have been heavily concentrated in a narrow group of large technology and semiconductor-related companies.
To give some context to the concentration, 95% of the index returns in April were driven by technology. TSMC, SK Hynix and Samsung alone were responsible for around 70% of the overall return. And these three now account for nearly 30% of the MSCI Emerging Markets index.
As SpaceX floats on the NASDAQ amid a fanfare of coverage, many sensible ‘sceptics’ are questioning the valuation. Will we look back one day on this as the point when the tech and AI bubble reached bursting point and popped – the point where modest hope turned to hype and hubris?
None of the trillion-dollar club members are pricing in quite the Shakespearian “expectation of plenty” levels that come with SpaceX – apart, perhaps from Tesla – but there are reasons to be fearful.
What Samsung shows us is that there are cheaper ways to access tech and AI growth stories. Underlining this point further, we recently initiated a position in tech holding company SK Square, whose 20% share of SK Hynix represents the bulk of its own market cap. It trades on a 40% discount to NAV, enabling us to buy Hynix for less than a P/E of 4!
Being selective and applying a strong valuation discipline to your investment approach may mean you miss out on further hype-fuelled growth. In my view, though, it mitigates risk and can help you generate more sustainable long-term returns.
Raheel Altaf is manager of the Artemis SmartGARP Global Emerging Markets Equity fund. The views expressed above should not be taken as investment advice.