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Apple Has Samsung to Thank for Today's Rally

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Here's something you don't see every day: Apple (NASDAQ: AAPL  ) posting strong gains while the market lags. Days like this have been few and far between over the past several months. Who does Apple have to thank for this rally? Samsung.

Wait, what?
The South Korean conglomerate unveiled its newest Galaxy S4 last night at an enormous media event in New York City. The debut has been one of the most widely anticipated consumer product launches in months, as Samsung has been very aggressively building hype for the device primarily through an unrelenting marketing campaign that ensures the word "Galaxy" is never far from the consumer eye.

Galaxy S4. Source: Samsung.

Much like the iPhone 5, the Galaxy S4 didn't have any major surprises for consumers and investors, as quite literally all details were leaked in advance in some form or fashion. Both devices are now the current flagships for each respective company, and will garner their fair shares of smartphone sales over the coming months.

The reason why Apple investors are feeling confident today is that the Galaxy S4 may not be able to live up to the hype. That's the downside of an overt attempt to artificially drive anticipation, since it can potentially lead to feelings of disappointment. The Galaxy S IV simply isn't as big of an improvement as Samsung had led us to believe it would be.

Only Apple can pull off an Apple
There have been countless ways that Samsung has been copying Apple in recent years, and the Galaxy S4 is indicative of yet another way: incremental upgrades. Over the past six years, Apple has very successfully implemented a tick-tock strategy with iPhone upgrades, borrowing the strategy from Intel's arsenal.

The Cupertino company alternates major redesigns with incremental improvements each year. The most impressive part? This strategy simply shouldn't work in the high-flying and cutthroat smartphone market. In a world where most smartphone designs become dated in a matter of months, Apple is able to milk two years from a single external design without consumer fatigue. Apple has been able to execute this through a combination of higher build quality, robust app content, brand strength, and software differentiation.

Samsung, on the other hand, is still mostly a commoditized Google (NASDAQ: GOOGL  ) Android OEM. It has less strategic leverage to pull off such a move, as there is an army of OEMs lining up behind it all eager to take the Android crown. "Differentiated" software layers like Samsung's TouchWiz will only go so far, though Samsung's sheer size and marketing budget has become an important competitive advantage. After all, not every OEM can roll out to 327 carriers in 155 countries around the world in a matter of months.

Still, the market's tolerance of incremental upgrades will be much lower for a commoditized player relative to a differentiated company, and investors are optimistic that Samsung's new threat won't be as significant as feared.

Word on the Street
Piper Jaffray analyst Gene Munster considers the S4 to be an incremental upgrade, with spec bumps mostly in line with expectations. The display, camera, and processor were already mostly known quantities and Samsung's efforts to push new software features aren't quite game-changers, either. Munster considers Siri on iOS as and even Google Now on Android as more powerful features relative to what Sammy showed off last night.

His estimates are unchanged and expects Apple to keep a roughly 40% share of the high-end market this year, and still expects the company to sell 177.5 million iPhones in 2013. Munster doesn't believe that the Galaxy S4 will hurt iPhone sales, but it could easily win more Android sales.

Topeka Capital Markets analyst Brian White believes Apple's upcoming "iPhone 5S" will trounce the Galaxy S IV when it launches in a matter of months. The S4 is still less refined than Apple's build quality, in part because Samsung continues to use a cheap plastic casing that White considers "no match" to the iPhone 5's aluminum unibody chassis.

White notes that the popular perception is that Samsung is absolutely crushing Apple in the smartphone market, a notion that he considers "complete nonsense." It's true that Samsung has become the top vendor worldwide, but most of those gains are in low-end emerging markets, not high-end flagships.

To be fair, there are also analyst bears, too. Jefferies analyst Peter Misek thinks the device is an "incremental negative" for Apple, and Nomura analyst Stuart Jeffrey sees the S4 potentially helping Samsung overtake Apple in the high-end segment.

Judging by Apple's gains today, investors obviously aren't too impressed with the Galaxy S4, either.

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Read/Post Comments (6) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 15, 2013, at 9:07 PM, techy46 wrote:

    Ok, so now we have 4-5" phones that can mimic a pretty good camera, gameboys and PC apps and make phone calls with 32-96Gb of storage for $200-900. We have 7-10" tablets can do all that too with 64-256Gb of storage for $200-1000. We've got 11-16" notebooks that can also do all that too for $500-1500. Now what?

  • Report this Comment On March 15, 2013, at 10:02 PM, twolf2919 wrote:

    I think this article is right on target: one of the reasons AAPL has been languishing was the fear of Samsung's upcoming S4. Because the iPhone 5 was not as revolutionary as investors had expected and Samsung's S3 had been nipping at iPhone 5's heels, the fear was that the S4 would blow Apple's device out of the water. But Samsung didn't wow. It's S4 should have been called an S3s to borrow Apple's naming scheme - an incremental improvement of the S3.

    On the way home I heard a Bloomberg reporter who attended the S4's Radio City "coming out party" and described the event as "bizarre". He complained that they actually had a little kid come on stage and tap-dance! "They used a tap-dancing kid to sell a phone! How bizarre!" (I'm paraphrasing).

  • Report this Comment On March 15, 2013, at 10:04 PM, tychicum wrote:

    SSNLF.PK 1386.78 -63.22 -4.36%

    Today Samsung is down ANOTHER 4 percent. Why aren't any analysts covering this? Don't they watch anything other than Wall Street?

  • Report this Comment On March 15, 2013, at 10:13 PM, greentree5508 wrote:

    "[the two year] strategy simply shouldn't work" - well it works since US cell phone carries are also on the "two year" contract cycle. It's actually quite ingenious- if you are locked into a cell phone (contract) for two years and Sprint/Verizon won't give you another [free/subsidized] phone for another two years, why should Apple rush the cycle? Most end-users will not get phones faster than their [cell phone carrier] contracts subsidize, anyway....

    Disclosure: Long on AAPL

  • Report this Comment On March 15, 2013, at 10:24 PM, FreeRange1 wrote:

    I watched a little of the live feed of the Radio City launch event. It was a reflection of this overhyped trash company. An embarrass and painful event to watch. Keep spending those 100's of millions of dollars on pr and phony hype Samesung - that should help you build better phones right?

  • Report this Comment On March 16, 2013, at 1:08 AM, SyDVooh wrote:

    It's nice for AAPL longs, that Samsung actually believes its own press releases.

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