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Samsung’s Explosive Problem Could Be Good News for Apple Inc.

By Ben Estep – Sep 21, 2016 at 5:21PM

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The latest iPhone stands to benefit from the massive recall of the Galaxy Note7.



Samsung Galaxy Note7. Image source: Samsung.

The timing of Samsung's (NASDAQOTH: SSNLF) voluntary recall of 2.5 million Galaxy Note7 smartphones could not have come at a better time for Apple (AAPL -2.63%), which just released the new iPhone 7 and 7 Plus. Let's take a closer at what led to the recall and the boost this could have for iPhone sales.

The exploding smartphone

As far as brand image goes, it doesn't get much worse for a company than having one of its flagship devices burst into flames all over the country, especially when it's something that many customers keep in their pockets and hold up to their heads on a regular basis.

Unfortunately for Samsung, that's exactly what happened with the Note7, released in mid-August. In the ensuing weeks, the media reported dozens of cases where the lithium-ion batteries in the Note7 have spontaneously caught fire and exploded. While this is a small number relative to the 2.5 million units sold worldwide since the release, Samsung didn't want to risk further incidents and decided to halt sales and issue a voluntary recall of the phone. Depending on where customers purchased the device, they can receive a replacement phone with a new battery directly from Samsung, a refund, or an exchange for a different model.  

And Samsung's problems keep getting worse. There were reports over the past weekend that a 6 year-old boy in New York suffered burns and was rushed to the hospital after the Note7 he was playing with exploded in his hand. This news follows earlier reports from around the world of explosions that have led to fires in homes, hotel rooms, and cars. Samsung's stock is down a little over 5% since the recall was announced -- wiping out a over $10 billion of market value and resulting in shake-up of leadership at the company.

The impact on Samsung

The Note7 recall has been a major blow to Samsung's efforts to gain market share in the competitive smartphone market and could have a lasting impact on its brand image. Third quarter results are expected to take up to a $900 million hit as a result of lost sales and recall costs.

Analysts are now expecting sales of around six million units of the Note7 in the third and fourth quarters, significantly lower than earlier estimates of 12 million to 15 million units. The Note7 fiasco could also cast a shadow over Samsung's S8 smartphone launch in early 2017. 

How Apple can benefit

Apple's financial results are largely dependent on the success of the iPhone. Fiscal third quarter revenue declined 15% year-over-year to $42.3 billion, largely a result of selling 15% fewer iPhones. Fears of market saturation for its best-selling product and the implications from the declining revenue caused the stock to hit a 52-week low of $89.47 in May, though it has since recovered almost 20%. The launch of the iPhone 7 and 7 Plus could help reverse the falling revenue, and carriers are already reporting strong pre-orders for the new smartphone, although Apple hasn't released any specific sales figures.

According to T-Mobile president and CEO John Legere, "iPhone 7 is the biggest preorder in T-Mobile's history, and that says a lot about our momentum and the excitement customers have for iPhone 7 and iPhone 7 Plus!" Sprint said the first three days of pre-orders of the iPhone 7 and 7 Plus are up more than 375% over the first three days of pre-orders from the previous iPhone launch. Based on strong anticipated demand, and in the wake of the Note7 recall, Apple reportedly increased its order for parts and components used in the new devices' production by 10% earlier this month.

If Samsung has further issues with the Note7, or future smartphone models, it could be a devastating blow to the company's growing smartphone business and a boon for Apple and other competitors. It's hard to know the exact correlation between Samsung's explosive problem and a successful iPhone launch, but the timing was rather fortuitous and could result in a sizable sales bump for Apple in the coming quarters.

Ben Estep has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool recommends T-Mobile US. 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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