Samsung's Fumble Gives Apple an Opening

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Sometimes record profits just aren't enough. On Friday, Samsung estimated that its second-quarter revenue would be approximately $49.9 billion, which should translate into an operating profit of more than $8.3 billion. That would be an increase of 47% in operating profits and would represent record highs for the South Korean conglomerate.

Investors were not impressed. Analysts had been modeling for $51.4 billion in sales and $9.3 billion in operating income. As a result, shares fell nearly 4% on the figures. After losing 13% of their value in June, Samsung is now 20% off its peak.

Samsung is currently experiencing exactly what Apple (NASDAQ: AAPL  ) has been going through over the past 10 months. The Mac maker also put up its own all-time record quarter in terms of revenue, iPhone units, and net income, yet shares plunged 11% in January.

Galaxy S4. Source: Samsung.

Both companies face lofty investor expectations that are becoming increasingly difficult to meet. Big numbers alone just won't cut it anymore. Apple investors weren't satisfied with the 5 million iPhone 5 units that were sold during launch weekend. Samsung investors think the company should have been able to ship more than 20 million Galaxy S4 units in the first two months. Analysts have continued to reduce estimates on the Galaxy S4, although Samsung doesn't regularly disclose unit sales or product mix.

Apple reports total iPhone units but doesn't detail product mix, either. ISI Group analyst Brian Marshall estimates that the iPhone 5 sold twice as fast as the Galaxy S4 at launch, hitting 20 million in unit sales after just 25 days.

The high end of the smartphone market is quickly maturing and reaching saturation, which is presenting headwinds for both Apple and Samsung. Apple is widely expected to release a mid-range iPhone model for the first time this year, while Samsung has long played a wide plethora of price points to rise to the No. 1 vendor by volume.

Samsung's mobile business contributed 74% of all operating income, underscoring how important its smartphone business is. Some analysts believe that the semiconductor component business is being underappreciated, as Samsung's vertical integration is a distinct competitive advantage.

However, Apple is reportedly moving as much component business as it can away from its largest rival and has inked a deal with Taiwan Semiconductor to manufacture future processors. That transition alone could hurt Samsung's component business to the tune of $5 billion in annual sales. The semiconductor segment represented 12% of operating income in the first quarter.

With Samsung's flagship Galaxy S4 launch in the rearview mirror and unit sales proceeding at a disappointing pace, Apple has an opportunity to win back investor favor when it launches new iPhones in just a matter of months.

Even if Apple steals the show back with new iPhones this fall, the company will still eventually cannibalize the device. Apple has a long history of destroying its greatest products, but importantly, it does so profitably by disrupting itself. Read up on how Apple has been so successful undermining previous successes by clicking here.

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  • Report this Comment On July 07, 2013, at 10:17 AM, ScottAtlanta wrote:

    I'm so tired of hearing this PR spin, "....the company will still eventually cannibalize the device. Apple has a long history of destroying its greatest products, but importantly, it does so profitably by disrupting itself..."

    It celebrates exploitation. I sell you one expensive gadget....but don't worry, I'll strip the value from that gadget and make it obsolete so I can sell you another expensive gadget. You pay many, many times ....we call it creative destruction.

    It's one of worst forms of capitalism where any value is quickly destroyed so you spend more of your limited resources (time, money, labor) to acquire the next thing that will soon be worthless.

    Another name for this is "Endless Exploitation."

    Fortunately, another model....the one that will win for one of increasing value for less money. So at least the individual's life will improve with less capital (money, labor, effort, time) spent.

    And all those billions of dollars of profit....the result of the obscene excess Apple demanded from every customer....can stay in the pockets of the average feed and educate their kids, buy a home, etc.

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