Is Samsung in Trouble?

Learn why the world's largest smartphone maker had disappointing earnings this quarter.

Jul 14, 2014 at 2:00PM

The world's largest smartphone manufacturer, Samsung (NASDAQOTH:SSNLF), is expecting a third straight quarter of profit decline, as it forecasts profit of $7.1 billion after revenue of $51.5 billion, which is $1.4 billion lower than the Street consensus.

Profit for this quarter is down 24.5% from the same period last year, suggesting that the company is suffering from fierce competition from Apple (NASDAQ:AAPL) and Chinese players, such as Xiaomi and Huawei. To make matters worse, there's a worrying cannibalization trend of tablet sales by phablet phones. Is the world's largest smartphone maker in trouble?

Samsung

Source: Samsung

The earnings
Profits are down 24.5% from the same period last year. Moreover, for the display unit, which supplies Apple and other major smartphone manufacturers, quarterly profits are expected to fall 76%, which is a signal that the entire smartphone and tablet industry may be suffering from low volumes.

In an usual step, the Korean giant released a whole page of reference material for the next quarter. This is probably an effort to reassure investors that Samsung remains committed to long-term growth. The company explained that the decrease in earnings was mainly due to phablet sales eating into tablet sales, an increase in marketing spend, adverse currency fluctuations, and weaker sales in China due to seasonality and consumers saving for upcoming 4G devices.

The phablet threat: implications for Apple
Phablets are a real threat to Samsung. The company said that "higher shipments of 5-to-6 inch large screen smartphones replaced demands for 7-to-8 inch tablets." Moreover, according to the Korean giant, phablets may have a shorter replacement cycle than tablets and smartphones.

Apple, which is said to be preparing a larger version of the iPhone, should be particularly worried about this industry trend. In the worst scenario, Apple's new iPhone could end up cannibalizing sales of the iPad, which still make up 16.7% of the company's total revenue, just like Samsung's phablets are cannibalizing sales of its tablets.

China
Regarding China, Samsung's earnings could be used as a proxy to forecast the numbers of Xiaomi, Lenovo, Huawei, Coolpad, and other Chinese manufacturers. Note that Apple, which signed a major distribution deal with China Mobile in January, is also highly exposed to China's weak smartphone demand.  

Emerging markets
According to IDC, shipments of tablets from India for the April-June period stood at 0.8 million units, representing a 32.8% drop over the corresponding period in 2013.

Note that the same market research company lowered its 2017 tablet forecast in late 2013 from 407 million to 386.3 million, taking into consideration increasing phablet sales.

The phablet threat may be particularly strong in emerging markets, where customers must choose between a phablet or a tablet, due to budget constraints. This is clearly a bearish signal for the whole industry, as most smartphone and tablet manufacturers see emerging markets as key growth drivers, due to their relatively low smartphone penetration rate.

Final Foolish takeaway
Although the Korean giant is currently suffering from the phablet threat, fierce competition from Chinese manufacturers, and weak demand in key markets, it's important to note that demand for Samsung products still remains high. Additionally, it should be noted that the Korean giant suffered from some extraordinary events in the first quarter, such as adverse currency fluctuations (the Korean Won is trading at six-year highs) and seasonality. 

Going forward, the Korean giant may see a slight improvement in the next quarter, as it is preparing new product launches in the second half of the year, including the promising Galaxy Note model. However, a long-term improvement in earnings may only be achieved by applying a strong differentiation strategy. Unfortunately, this is going to be increasingly difficult, as Chinese competitors such as Xiaomi are showing strong commitment to innovation, despite their smaller R&D budgets. 

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

 

Victoria Zhang 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers