As published in the 12/31/23 Ariel Investment Trust Quarterly Report
Samsung Electronics Co., Ltd. is a key player in the global technology sector, offering an extensive array of products, including smartphones, tablets, TVs, home appliances, and communication equipment. The company specializes in semiconductor components such as memory chips (ubiquitous in modern-day electronics), operates a foundry for semiconductor fabrication, and manufactures display panels. Semiconductors and mobile are two key profit drivers for the company.
Market Leader in Cyclical Recovery
The memory industry is highly consolidated and Samsung Electronics maintains a prime position in both, leading in process technology and profitability. These aspects are interrelated, as process technology plays a crucial role in cost advantage gains. Samsung’s memory business was significantly impacted by the industry downturn in 2023. The down cycle, triggered by a broader tech downturn, resulted in weaker demand and lower memory prices. In response to an oversupply issue, major suppliers took significant steps to reduce production in the latter part of 2023. The signs of recovery observed in the fourth quarter are likely to result in increased prices and higher profits given the supply constraints this year. Long-term, greater demand for artificial intelligence (AI) memory will be an inflection point for Samsung, resulting in share gains in the latest memory generation, High Bandwidth Memory (HBM). Additionally, high-end AI servers are expected to significantly boost memory demand.
Underappreciated Due to Conglomerate Discount
Samsung Electronics trades at a discount and has upside. The company is a leader in organic light- emitting diode (OLED) display panels—this dominance enabled the business to generate leading operating margins. The growth potential is derived from OLED panel expansion beyond smartphones and increased foldable phone penetration, which is not currently priced in the stock. As one of three global foundries with leading-edge capability, which is crucial in the AI era, we believe Samsung is undervalued. Our experience in this space has taught us the partial or full value of these businesses can be fully realized once there is more transparency in reporting and/or corporate actions. Since Samsung is a conglomerate, we are not currently paying for this favorable optionality.
As of December 31, 2023, shares of Samsung Electronics traded at a forward price-to-book (P/B) ratio of 1.5x, a discount compared to its peers SK Hynix (1.8x) and Micron Technology (2.1x). Given the company’s strong market position, we see the opportunity for capital appreciation, which will continue to improve in the near term from the cyclical recovery in the memory market and longer term by the secular growth drivers in the semiconductor industry.
The companies highlighted in the Company Spotlights were held in one or more of the following Fund portfolios during the quarter ending December 31, 2023: Ariel Fund, Ariel Appreciation Fund, Ariel Focus Fund, Ariel International Fund and Ariel Global Fund. We candidly discuss various individual companies to illustrate our investment process. The information and our opinions were current as of the date above but are subject to change. The information shown does not provide information reasonably sufficient upon which to base an investment decision and should not be considered a recommendation to purchase or sell any particular security. These securities do not represent all securities purchased or sold to investors during the period. The performance of any single portfolio holding is no indication of the performance of other portfolio holdings of any Fund or of any particular Fund itself. Portfolio holdings are subject to change. Past performance does not guarantee future results. Click here for the top holdings of the Funds.
Investing in equity stocks is risky and subject to the volatility of the markets. The performance of any single portfolio holding is no indication of the performance of other portfolio holdings or its strategy. Investing in small- and mid-cap stocks is more risky and volatile than investing in large-cap stocks. Investments in non-U.S. securities may underperform and may be more volatile than comparable U.S. stocks because of the risks involving non-U.S. economies, markets, political systems, regulatory standards, currencies, and taxes. The intrinsic value of the stocks in which the Funds invest may never be recognized by the broader market. The Funds are often concentrated in fewer sectors than their benchmarks, and their performance may suffer if these sectors underperform the overall stock market. Ariel Focus Fund is a non-diversified fund and therefore may be subject to greater volatility than a more diversified investment. Investments in emerging and developing markets present additional risks, such as difficulties in selling on a timely basis and at an acceptable price.
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