Samsung Probably Lost Share to Apple

In an interesting turn of events, Samsung (NASDAQOTH: SSNLF  ) reported some pretty ugly guidance for the final quarter of 2013. Keep in mind that an "ugly" quarter from an operating profit perspective means operating profit of roughly 8.3 trillion Korean won at the midpoint (or about $7.8 billion), but this was below even the most bearish sell-side expectations of 8.8 trillion won. What's happening here is likely a double whammy: share loss to Apple (NASDAQ: AAPL  ) and slowing high end of the mobile market.

Samsung share loss to Apple
Samsung has spent an enormous amount of money on marketing its mobile products -- about $14 billion for the year. This budget, coupled with an aggressive push into many variants and form factors, has allowed Samsung to capture nearly as large a piece of the mobile profit pie as Apple has (while other players like HTC and Motorola continue to lose money).

However, it seems that with Apple on top of its game with the Retina iPad Mini, iPhone 5s, and iPad Air, the Cupertino giant is winning back share that it had previously lost to Samsung. Further, this phenomenon could get worse if, or when, Apple rolls out its rumored iPhone Air large-screen phone to take further share from Samsung's Galaxy Note products.

The high-end market is slowing down
Interestingly, while Samsung seems to be losing share to Apple at the very high end, another force working against the company is the dramatic slowing of high-end growth in the handset market. With this portion of the market slowing, and with Apple taking back share, Samsung's exposure to the mobile market is increasingly at the low end.

There's nothing wrong with the low end for a company like Samsung, but it does mean that the obscene profitability that the smartphone boom initially drove could come to an end. Further, if Apple is successful at sewing up the high end, Samsung will suffer some real margin compression.

The question is now at the low end
At CES, Intel partner ASUS launched a new line of phones known as the ZenFone, which ranged from $100-$200 without a contract. The phones ran Android and actually looked like a pretty interesting value. If more traditional PC vendors start going all-in on smartphones, and if the market fragments as the PC market has, then Samsung's main profit drivers could be in trouble -- although this really is a longer-term concern.

Foolish bottom line
It looks as though the same phenomenon that hit Apple (a contraction of profitability) back in 2012 is beginning to hit Samsung in early 2014. While the smartphone as a category has been hot and flashy, and while there is a very lucrative high end for Samsung, the risk from Apple at the high end (and from smaller players at the low end) is very real. This is why Samsung trades at roughly seven times earnings -- the risks to that profitability are simply enormous longer term. 

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Comments from our Foolish Readers

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  • Report this Comment On January 08, 2014, at 7:55 PM, bugnuts wrote:

    Samsung's $16 billion in marketing money couldn't buy enough sales to disguise the fact its products are second-rate knock-offs.

  • Report this Comment On January 08, 2014, at 11:16 PM, JAVKO wrote:

    Has anyone ever seen an audited report from Samsung?

    P/E of 7!!!!!!

  • Report this Comment On January 09, 2014, at 12:12 AM, Waldo wrote:

    They still felt it necisary to reward themselves for lackluster sales with big exec bonuses. Who says Samsung doesn't copy other U.S. companies. And I agree with the above comments 100 percent.

  • Report this Comment On January 09, 2014, at 1:33 AM, johnestromjr wrote:

    The demand for high end devices from Apple is far from over. There are many who, when it's time for an upgrade will switch from Android to Apple. The number leaving Android is about 4:1 favoring Apple. There are a lot of Apple customers, as well, that will get that next iPhone 6 and iPhone 7 etc so long as Apple makes the best smartphone on Earth. There is also a hungry China which is just getting started. Like we Americans and like the Japanese, the Chinese middle and upper class will buy 'the best' - and that's Apple. There will be further upgrades in iPads, iPhones with larger screens and higher definition as well. An iWatch and an iTV will be icing on the cake. Samsung's problem is that they build a 'good" smartphone - but not a great one. Apple's build quality is the Rolls Royce of the high tech world and in performance it's the Ferrari of the tech world.

  • Report this Comment On January 09, 2014, at 9:23 AM, Jjkiam wrote:

    Ashraf I am shocked and surprised to see a somewhat negative slant to your article on Samsung! This is a reversal from all the previous posts where you clearly made them out to be invincible. Nice to read a more balanced viewpoint on what had been your favorite Apple nemesis!!!

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