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Hot off the heels of Apple's (NASDAQ: AAPL ) successful iPhone 5S launch, there seems to be a renewed optimism that the high end of the smartphone market isn't completely dead. That being said, many Apple bulls point out that this may be a case of share gain at the high end rather than renewed growth in the actual market. While the answer to this question remains elusive, investors are likely to get their answer following the launch of Samsung's (NASDAQOTH: SSNLF ) upcoming Galaxy S5.
Samsung to Apple: "Mine is bigger than yours"
While Apple tends to focus on refining the user experience with a tight marriage of hardware and software, Samsung plays a more brute-force game commensurate with the fact that it is one of the best component manufacturers in the industry. When it comes to leading edge display technology, DRAM, NAND, and logic semiconductor manufacturing, Samsung does an exceptional job. However, when it comes to actually designing and selling a refined device, very few would argue that Samsung has a leg up on Apple.
The Galaxy S5 is likely to be bigger, faster, and bolder than the preceding Galaxy S4. While the company hasn't formally announced the hardware specifications, rumors are pointing to a "64 bit processor" (this really is marketing, but Apple started it), 3GB of RAM, a 5" high resolution display, and a 16 megapixel camera. It is likely that from a hardware perspective that this will be a compelling device -- although the same exact thing could be said about the Galaxy S4, S3, and so on. These have been very popular devices, but it's important to keep in mind just how aggressively Samsung markets its products compared to Apple.
All eyes on growth
The Galaxy S4 sold about 20 million units within the first two months of its launch and has sold about 40 million units to date. This is certainly impressive, but the key metric to watch will be growth. Will sales of the Galaxy S5 be better than its predecessor?
If it does, then this is good news not only for Samsung, but for the high-end market in general (and one would expect some real optimism to be associated with key Samsung suppliers such as Broadcom (UNKNOWN: BRCM.DL ) and Qualcomm (NASDAQ: QCOM ) . If it doesn't, then Samsung is either losing significant share to Apple (which wouldn't be terribly surprising), or the high-end market is sputtering.
While Samsung benefits handsomely from the low end, and while many of the key chip suppliers play in the low end, the interesting investment opportunities will come from scoping out component vendors that are able to design the cheapest, "good enough", components/platforms without sacrificing margins. Lenovo (NASDAQOTH: LNVGY ) , for example, is doing exceptionally well with its low-cost handset lineup in China, and Qualcomm is shifting its focus on the lower-end (but highest volume) portions of its chip lineup. As the teardowns come in, more component/chip opportunities will present themselves.
While Samsung would certainly love to gain share in a growing high-end handset market (double whammy), the company is built to conquer market segments where a focus on low cost through component in-sourcing and sheer scale can win a war. It also doesn't hurt that Samsung has the 8th most valuable brand according to Interbrand. These serve to differentiate Samsung in what is a very crowded low-end handset market, and what allows it to compete with such a favorable margin structure.
Foolish bottom line
While the Samsung Galaxy S5 should see healthy initial demand, the longer-term trend (say over a couple of months) will really answer the questions about share vis-à-vis Apple. Both companies' results together -- should paint a clearer picture of how the high-end handset market is doing. Whether the high end market thrives or not, Samsung is well positioned, but for Apple the high end is everything -- and it will fight tooth and nail to keep Samsung at bay.
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