When Samsung (NASDAQOTH:SSNLF) first announced its new flagship Galaxy S5, the reviews seemed fairly mixed. The device was packed with a lot of features and offered solid hardware and performance, but the idea here was that it was simply evolutionary and not revolutionary.
According to BMO Capital Markets, Samsung's smartphone sales are tracking lower than expected, much to the chagrin of Qualcomm (NASDAQ:QCOM) which collects royalties on the sale of the device and also supplies much of the phone's silicon content. While there's certainly a story here around the implications for Qualcomm, it's worth focusing on the implications for Samsung and the broader smartphone market.
What's going on here?
In its report, BMO slashed its estimates for Qualcomm's total reported device sales (this is the value of all 3G/4G devices sold which is used to calculate the royalty payments to Qualcomm) and now expects that number to come in at $61.7 billion for Q2, down from an earlier estimate of $66 billion. Further, BMO expects that Q3 total reported device shipments should come in at $65.1 billion, down from prior estimates of $70.2 billion with this weakness driven by Samsung.
Samsung sells a bunch of different phones across a variety of regions. At the high end, it sells its iconic Galaxy S and Galaxy Note product families. At the mid-range and low end, Samsung sells many types of phones, including:
- Galaxy Mega
- Focus (Windows Phone)
- Galaxy Beam
- Galaxy Grand
- Galaxy Express
- Galaxy Ace
It's conceivable that Samsung's smartphone weakness is due to worse-than-expected sales at the low end of the market, particularly as white box Chinese players start to flood the market with relatively high quality, low cost devices.
However, since the low end of the market seems to be growing incredibly quickly (meaning -- at least for now -- that there's room for multiple players) while the high end has shown signs of stagnation, I'd be more inclined to put the blame on the recently launched Galaxy S5 failing to stimulate demand.
Share loss to Apple, HTC, LG, or just secular weakness?
Assuming that the weakness is at the high end of the market, there are two things that it could be attributable to:
- Market share loss
- Secular slowdown
As far as market-share goes, some of Samsung's major competitors at the high end of the market include Xiaomi, HTC, Apple (NASDAQ:AAPL), and LG. Xiaomi competes mainly on price, Apple competes on its brand and iOS software ecosystem, HTC competes on industrial design (usually sacrificing margins to do so), and LG is very similar to Samsung in trying to find a good balance between cost/features (for example going with a "faux" metal to save on costs while still giving a premium feel).
It's likely that these competitors -- especially given how compelling their phones seem to be this round -- are gaining share. However, if this were just a case of share loss for Samsung then the total reported devices as far as Qualcomm's concerned would be unaffected.
Given that Samsung commands much of the non-Apple market share at the high end, there's a decent chance that Samsung is getting hit with either average selling price pressure or is simply losing share.
Foolish bottom line
Samsung's very robust financial position means that even if it isn't growing at the rate that it used to, it can still out-spend (particularly on marketing) and out-invest (in new areas/markets) its competition. However, it's likely that Samsung has successfully capitalized on the smartphone market and now needs to look to new areas for growth. Is it any surprise that the company is now aiming to be the world's leading semiconductor foundry?
Ashraf Eassa has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and Qualcomm. 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.