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The Pain Is Only Beginning for Samsung Electronics (SSNLF) Stock

In the second blow of a one-two punch combination, after axing its Galaxy Note 7, Samsung Electronics (OTCMKTS:SSNLF) dished out revised revenue and earnings guidance for its third quarter. Here’s a hint: It’s not good.

Samsung stock fell on the news, of course, as its guidance reflects the impact the recall may have on the company’s numbers. The South Korean counterpart to the thinly traded, OTC-listed SSNLF stock lost 8% of its value on Tuesday on the heels of the decision to completely kill off that particular smartphone. And it was down a bit again today when the company quantified the debacle.

Read the fine print, though: As ugly as the revised Q3 guidance was, it doesn’t even come close to measuring the fiscal impact from events that occurred after the quarter in question ended.

Investors must come to grips with the reality that Samsung could be fighting a losing battle for a long while.

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In the grand scheme of things, it doesn’t seem all that bad. Samsung was looking for sales of 49 trillion won for the quarter ending in September, and now it’s looking for 47 trillion in revenue.

In U.S. dollars, that’s a difference of about $1.7 billion for a company that’s generated about $184 billion worth of revenue over the course of the past four quarters.

The impact is expected to take a relatively bigger toll on the bottom line, although expectations are still palatable, all things considered. Specifically, income expectations of 7.8 trillion won ($6.9 billion) for the quarter ending in September were cut by about a third — to 5.2 trillion won ($4.65 billion). It’s a step in the wrong direction to be sure, but most Samsung stock holders know it could have been worse.

Thing is, it is going to be worse.

As of the end of September, when the company’s fiscal third quarter officially ended, the gaffe hadn’t yet reached epic proportions. The recall didn’t begin until Sept. 2, after only a few reports of fires. At the time, Samsung determined it was a faulty lithium-ion battery that proved to be the danger. An easy fix. Simply swap the removable battery out for a proper one.

Indeed, the battery replacement program was the M.O. and presumed to be a fix until the beginning of this week, when some of the devices that were thought fixed by Samsung overheated and caught fire anyway. It wasn’t until just the past few days — well past the end of Samsung’s Q3 — that the full brunt of the problem became clear. It’s not the battery. It’s the design.

That’s not an issue that can be readily fixed by a recall of any scope or size. It’s easier, and cheaper, to simply stop making the device and collect all the ones that have already been sold. It’s also an embarrassment Samsung will struggle to get over.

Sure, a defective battery is a nuisance, but most consumers understand it’s a simple and replaceable component that can be difficult to inspect for safety-bases reasons. The device itself, however, was engineered from the ground up by an experienced team. This is a mistake that should have never been made, leaving consumers to wonder what else the company might have missed with their other electronics.

It wasn’t something consumers were forced to wonder, though, until after the third quarter had been completed.

A shoddy product is one thing. A dangerous product is another. Just ask Chipotle Mexican Grill, Inc. (NYSE:CMG).

It was in late October of last year burrito chain Chipotle Mexican Grill was first implicated as the source of an E. coli outbreak, and not unlike Samsung, it took Chipotle a little too long to determine the true problem. It wasn’t a mere computer glitch.

Consumers were becoming physically ill with a serious even if not-usually-fatal disease. CMG stock is still down 40% from its pre-contagion high, even though the E. coli outbreak has been contained for months now and the company completely overhauled its safety protocols. The company’s results have remained persistently weak.

Consumers may have forgiven the company, but they certainly didn’t forget. They’ve since found other places to eat.

By that same token, smartphone-using consumers likely understand that the flaws of the Galaxy Note 7 don’t necessarily mean everything else Samsung makes is similarly flawed. But the damage is done. Most current and would-be Samsung phone owners have redirected their interest to (or back to) the iPhone, from rival phone maker Apple Inc. (NASDAQ:AAPL).

The revolt, however, didn’t happen until this month, and as Chipotle has proven, revolts can linger for a long time. It could be a while before Samsung stock isn’t a liability, as the company pays for the recall, both in monetary and brand value.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/10/samsung-stock-ssnlf-galaxy-note-7/.

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