After trimming back our Samsung (XKRX:005930) weighting in 2017 and early 2018, we took advantage of recent price declines to increase our exposure during the third quarter. We believe the shares are incredibly inexpensive, and the low valuation provides exceptional risk/reward despite some short-term concerns about the semiconductor business.
In our opinion, Samsung’s current valuation implies no value at all for its dynamic random-access memory (DRAM) and NAND memory (flash) businesses. Samsung’s other businesses—including phone, display, consumer electronics, automotive, and foundry—plus the value of its significant excess cash and investments lead to a value for the memory business around zero despite our expectation of $40+ billion in pre-tax memory profits in 2018. We think Samsung’s memory businesses are well positioned for growth over time as demand increases due to long-term tailwinds from virtual reality, autonomous driving, and big data. While the memory market has experienced vicious cycles in the past, we think the industry has changed significantly for the better, especially in DRAM where three competitors control more than 90% of production and uses for the product have diversified. DRAM sales used to be dominated by PC DRAM sales, but today, mobile and server DRAM far exceed sales to PC manufacturers.
From Yacktman Asset Management (Trades, Portfolio)'s Yacktman Fund (Trades, Portfolio) third quarter 2018 shareholder letter.
