Samsung Stumbles As Apple Soars

As Samsung's mobile profits decline, Apple gears up for a potential iPhone sales explosion later this year.

Apr 29, 2014 at 8:36PM

It's no secret that Apple's (NASDAQ:AAPL) most dangerous rival is Samsung (NASDAQOTH:SSNLF), the South Korean electronics giant that saw its fortunes surge when it decided to follow Apple's lead in the smartphone market. Today, Samsung Electronics is one of the most profitable companies on the planet, having generated a whopping $8.24 billion in operating income in the most recent quarter. That said, as great as Samsung's financial results are in an absolute sense, the trend is starting to look less encouraging.

Mobile sales down year over year -- does it get worse?
In the most recent quarter, Samsung's total sales were up slightly at 53.68 trillion KRW from 52.87 trillion KRW a year ago (this is a 1.53% year-over-year increase). Interestingly enough, though, is that mobile sales were down from 32.17 trillion KRW ($31.24 billion) to 31.36 trillion KRW ($30.45 billion) (a decline of about 2.5%). While the newly released Galaxy S5 and the refreshed Galaxy Tab/Note series will help in the current quarter, it's starting to look pretty difficult for Samsung's mobile group.

In particular, at the high end, Apple seems to be solidifying its position and could gain even further market share with the larger iPhone that is rumored to come out during the second half of the calendar year. In the Android space, many competitors -- such as Lenovo (NASDAQOTH:LNVGY), HTC, and Huawei -- are very aggressively pushing premium-spec'd phones at lower prices as they do not need the high profit margins Samsung currently commands.

Semiconductors -- driven by memory -- looking good, though!
While Samsung's total device sales and profit have come down on a year-over-year basis, the company's semiconductor business continues to boom. Indeed, sales -- driven mostly by memory -- were up 23% year over year. Thanks to consolidation in the memory markets, coupled with strong demand growth driven by the mobile and data-center booms, memory has been extremely good to all of the remaining players, of which Samsung is the largest.

Interestingly, if we strip out the memory numbers for Q1 2014 and Q1 2013, we see that Samsung's non-memory semiconductor business did about 3.46 trillion KRW ($3.36 billion) in 1Q 2013 and 3.1 trillion KRW ($3.01 billion) -- a 10.4% decline. This business includes CMOS image sensors, LEDs, and Exynos applications processors. In the earnings release, Samsung indicated that the decline quarter over quarter was caused by seasonally weak demand but didn't give color on the year-over-year decline.

Apple's chance to strike?
Apple's iPhone 5s and 5c have apparently been enough to start turning the screws on Samsung as well as some of the other mobile vendors. Given that even Apple acknowledges that there is real demand for larger screen devices, the opportunity for Apple to gain share and really knock it out of the park during the next fiscal year is very real. It is this anticipation that caused Apple's shares to soar following the most recent earnings report, and it is likely not misplaced.

Foolish bottom line
Samsung's life only gets more difficult as the rest of the Android market begins to fight for that Android smartphone/tablet share. Of course, Samsung's extremely large marketing budget will probably help it defend its position, but as Apple has proven, smart marketing can be just as -- if not more -- effective than simple brute-force marketing. It'll be interesting to see if Apple's larger iPhone, coupled with the mounting threat in the Android space, will serve to further erode Samsung's mobile profits. The tale will likely be written as we exit 2014, so stay tuned!

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Ashraf Eassa has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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