Samsung Electronics Co. (XKRX:005930, Financial)(SSNLF, Financial) announced the termination of production and sales of the Galaxy Note 7 smartphone on Tuesday.
Samsung officials cited safety concerns as the main reason for ending production. Shortly after the device’s launch in August, there were reports of the devices overheating and catching fire. Samsung cited the battery as the source of the problem.
The company issued a recall last month and apologized to consumers for the inconvenience. On Tuesday, Samsung again advised customers to stop using the device and turn them in. The company also urged retailers to remove the product from shelves. This action has already been taken by carriers in the U.S.
As the world’s largest manufacturer of smartphones by shipment and sales, the recall has damaged Samsung’s image, and the company will need to do a lot of damage control to remain favorable among consumers. In an attempt to appease consumers in its home country, the company promised a credit of 30,000 won ($27) to customers who switched to another Samsung device.
The market has not been kind to Samsung either.
On Tuesday, Samsung shares plummeted 8%, which marks its biggest one-day decline since 2008. The company’s market cap was also reduced. According to GuruFocus, as of Oct. 6, Samsung’s reported market cap was $226.9 billion; today it stands at $191.5 billion.
Samsung stock was trading at $1,350 on Tuesday. The DCF Calculator gives it a fair value of $1,026.9 with a -31% margin of safety.
A Seoul-based analyst for Macquarie, Daniel Kim, predicted the potential losses for the company could reach roughly $2.8 billion for the final quarter of the year. This could be enough to eradicate the mobile division’s fourth quarter operating profits.
Similarly, the recall does not bode well for Samsung’s market share in China. The company’s sales in China are already down due to competition from Apple (AAPL, Financial) and local players Huawei Technologies, Oppo Electronics, Vivo Electronics and Xiaomi Corp.
South Korean officials fear the halt in sales could hurt the country’s export numbers. Samsung’s mobile handsets are responsible for 2% of the country’s annual total exports.
Several analysts weighed in on the recall and how Samsung should respond to the situation.
Mark Newman, a Hong Kong-based analyst for Sanford C. Bernstein, said the company should eliminate the Galaxy Note series altogether, as the company has the Galaxy S series to fall back on. The Galaxy S outsells the Note by a 3-1 ratio.
Recently, Elliott Management called for change within the company’s structure and to enlist on a U.S. exchange.
Disclosure: I do not own stock in any companies mentioned in the article.
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