Watch stocks you care about
The single, easiest way to keep track of all the stocks that matter...
Your own personalized stock watchlist!
It's a 100% FREE Motley Fool service...
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.
3 stocks for your long-term portfolio
As every savvy investor knows, Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal The Motley Fool's 3 Stocks to Own Forever. These picks are free today! Just click here now to uncover the three companies we love.