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Just How Profitable Is Samsung?

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All too often, many mistake Samsung  (NASDAQOTH: SSNLF  ) for a low-end, nowhere-near-as-profitable-as-Apple (NASDAQ: AAPL  ) consumer electronics vendor. While Apple certainly has a tight grip on the high end of the handset market, Samsung owns a significant chunk of the low end, mid range, and even the high end of the handset market. In addition, Samsung is quickly becoming a leader in tablet volume shipments. Now, despite the fact that Samsung plays at all price points, its mobile profitability is truly high end and its business is on par with Apple's.

Samsung has been an exceptional growth story
In 2010, Samsung earned $15 billion in pre-tax operating profit, but by the end of 2013 the company is expected to rake in a whopping $35 billion. This growth has been primarily driven by the explosion in mobile devices, but this doesn't only refer to sales of Samsung's own smartphones and tablets. The company is also a component vendor. Here is a sampling of how Samsung profits from non-Samsung devices:

  • Memory -- Samsung is the world's largest vendor of DRAM and NAND flash. While these products transcend the mobile market (anything that computes needs DRAM and, increasingly, NAND), it's tough to ignore just how important memory is in the fast-growing handset market.
  • Displays -- Samsung is a major vendor of high-quality displays for everything from TVs to mobile phones.
  • Semiconductor logic -- The company profits from its biggest competitor, Apple, as it builds the A-series chips for the iPhone. Samsung also builds products for heavyweights such as Qualcomm.
  • Cameras/Image sensors -- Samsung is a leading vendor of cameras and image sensors.

Of course, the company also sells products like PCs, TVs, and other consumer electronics devices, but these are relative peanuts compared to the mobile market, which comprised 62% of the company's sales in Q2 2013. However, the key thing to note is that, despite Samsung's very large low-end mobile presence, its operating margins in the mobile business still came in at a respectable 17% (and on a rather large revenue base) in Q2 2013.

Is Samsung a more sustainable growth story than Apple?
Apple still makes more money than Samsung. The company turned in $50 billion in operating income last year, but Samsung's growth story is less risky. Apple could very well spoil Samsung's party with a bigger iPhone at the high end of the handset market, but Samsung still has plenty of growth left at the low end in both handsets and tablets. Further, Samsung is expanding its contract chip manufacturing and continues to enjoy a robust DRAM/NAND flash business thanks to tightened production and robust demand across the industry.

Samsung is a "brute force" kind of player; it doesn't have the finesse of Apple, nor does it seem likely that its customers will be as loyal as Apple's, but Samsung spends about $20 billion on SG&A (which includes hefty marketing) and even more on R&D to pump out many variants of its devices for each specific taste. There is beauty to this business model, particularly that it's not easily replicated by a smaller player.

Foolish bottom line
For those who believe that Samsung is a barely profitable, second-tier, low-end player, think again. This is a world-class company with exceptional profitability across a wide swath of businesses. While no company is without risk, and Samsung's highest-end devices are certainly at risk from an expanded Apple lineup (as well as other high-end players), it's important to understand that there's more than one way to run an extremely profitable business in a given industry. Apple and Samsung are proof of that.

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Read/Post Comments (7) | Recommend This Article (2)

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 December 09, 2013, at 3:48 PM, JackBaker1 wrote:

    Samsung is a slimy, unethical South Korean consumer electronics company. It is run by the Lee family. The patriarch of the Lee family and current CEO of Samsung is a two-time convicted felon and was sentences to 9 years in jail for bribing government officials -- among other things. Why would any red-blooded American give there money to this company when Apple is ethical, American, and the largest taxpayer to the U.S. Treasury?

  • Report this Comment On December 09, 2013, at 3:54 PM, dbtuner wrote:

    Agreed Jack. Also, the US has 40K troops in S. Korea to "protect" them because they can't protect themselves.

  • Report this Comment On December 09, 2013, at 3:57 PM, bugnuts wrote:

    Another Samsung apologist attempts to equate it with Apple. Sorry, but's still not close.

    Apple is finding ways to differentiate its products in ways Samsung will find much more difficult to steal. Samsung is full of lies and bluster, and it can't match Apple's formula for hardware and software excellence.

    I don't wish failure on any company, but Samsung truly deserves it.

  • Report this Comment On December 09, 2013, at 4:12 PM, melegross wrote:

    I think there is a big misunderstanding of what Samsung is. Samsung electronics is less than half of the company. Samsung heavy Industries makes things like oil tankers, power plants, etc.

    Comparing the entire company to Apple therefor, is misleading. Samsung also moves profits and sales around so that we really don't know exactly what is made where. It could be that they are losing money on phones, as they are likely doing on tablets.

    In fact, samsung'a tablet and smartphone sales aren't known—at all. They have t released quarterly numbers for sell through ever. Neither have they released sales to the channel. They used to announce shipments, but not since the first calendar quarter of 2011.

    Every number we seen of samsung's sales are guesses, which are never verified by subsequent release by Samsung. It's something to think about.

  • Report this Comment On December 09, 2013, at 5:20 PM, twolf2919 wrote:

    Would you care to point to some data that corroborates "its mobile profitability is truly high end and its business is on par with Apple's".

    I understand and agree with all your other statements regarding Samsung's diversified holdings, making its overall profitability as high as Apple's, but I simply don't believe that Samsung is anywhere near as profitable as Apple in the mobile business alone.

    [if I remember correctly, Samsung's total profitability just barely out-did Apple's last quarter, so how could it be anywhere close to Apple with its mobile profits?]

  • Report this Comment On December 09, 2013, at 5:36 PM, tychicum wrote:

    Samsung sells a killer digital bidet toilet seat. It is pricey for a crapper but one very nice seat. It even has blow dry! ... and a remote control!

    Dear Leader Kim Jong Un likes Samsung. When Korea is unified everyone will get a Samsung phone and a Samsung toilet seat !!!

  • Report this Comment On December 10, 2013, at 3:18 AM, kevins71 wrote:

    Well Duh! When Samsung charges 400% mark-up on the cheap plastic phones, it's a no brainer. And frankly Samsung is no where near as profitable as Apple is in the mobile arena. You are highly mistaken there.

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