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Is Apple Winning the War Against Samsung?

It seems that the chief financial officer of Samsung (NASDAQOTH: SSNLF  ) isn't all too confident in how the South Korean consumer electronics giant is going to do this quarter, remarking that it "doesn't look too good" to a group of reporters in South Korea. In light of these remarks, is Apple (NASDAQ: AAPL  ) truly winning the war against arch-rival Samsung?

Samsung Electronics' results are driven principally by mobile
If you take a look at Samsung's 2013 financial results, you'll see that 68% of the company's operating profit came from the sale of mobile devices (likely dominated by smartphones). Similar to arch-rival Apple, Samsung lives and dies by the success of its mobile products.

Given that Samsung's CFO doesn't think that the result for the quarter will be all that good, it seems likely that the weakness is coming from mobile. The bigger question, then, is what's causing this weakness and whether Samsung can do much to reverse it?

Feeling the squeeze?
Apple, which still owns the majority of the profits in the smartphone business, has recently seen a string of great quarters following a weak 2013. The iPhone 5s is still a solid design even in light of heightened Android-based competition, and the iOS ecosystem seems as sticky as ever.

At the low end of the market, smartphones continue to get better as prices for higher quality displays come down, Qualcomm and MediaTek's low cost chips continue to improve, and Google (NASDAQ: GOOG  ) continues to bulk up its open-source Android operating system.

Samsung certainly has the scale and brand to compete favorably here, but as the barriers to entry here are quite low (and continue to go lower), this business is likely to continue to get tougher on margins.

Put simply, Samsung's high end is probably being squeezed by Apple and potentially other Android vendors that have stepped up their respective games, and at the low end by vendors that don't need the kinds of margins that Samsung has come to expect (Samsung's corporate gross margin typically hovers around 40%).

Can Samsung do anything about it?
With Google bringing plenty of value to all tiers of the smartphone market with Android and the breadth of services that it offers (profiting from ad revenue generated when customers use Google search and other services), it'll become harder and harder to differentiate.

On top of that, Samsung's hardware "innovations" at the high end seem to consist primarily of trying to bulk up hardware specifications. By putting in higher resolution screens, faster Wi-Fi, more advanced processors, and so on, Samsung likely continues to drive its unit costs up even as average selling prices decline.

It seems that Samsung is subject to insurmountable secular/competitive forces. If so, it may just be that Samsung's monstrous profit growth that it has seen over the last few years (jumping from 13.8 trillion KRW in 2011 to 30.5 trillion KRW in 2013) was an unsustainable bubble.

Foolish bottom line
Samsung is likely to give formal earnings guidance in early July per Bloomberg, so we'll know in more precise terms what "not that good" actually means. When the company formally releases its results and hosts the accompanying call, we'll be able to get a better handle on what's driving the business and how to think of it longer term.

Oh, and when Apple reports its own results in late July, we'll know if it had anything to do with Samsung's shortfall.

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Leaked: Apple's Next Smart Device
(Warning, it may shock you)
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Ashraf Eassa

Ashraf Eassa is a technology specialist with The Motley Fool. He writes mostly about technology stocks, but is especially interested in anything related to chips -- the semiconductor kind, that is. Follow him on Twitter:

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