Winners and Losers of the Galaxy Note 7 Recall

Beyond Samsung (NASDAQOTH: SSNLF), the Galaxy Note 7's discontinuation will help and hurt other players throughout the smartphone industry, including chip manufacturers and other suppliers.

In this clip from Industry Focus: Tech, Motley Fool analysts Dylan Lewis and Evan Niu, CFA, discuss who stands to win and who stands to lose. 

A full transcript follows the video.

This podcast was recorded on Oct. 14, 2016.

Dylan Lewis: Evan, we talked about how the premium side of the smartphone market could see some shake-up. We might see some consumers that were interested in the Galaxy line, maybe they were Galaxy Note owners, taking this opportunity to either try an iOS device, maybe another Android device. Do you think there are any big beneficiaries with this?

Evan Niu: I think there are definitely some winners and losers. If we start with the loser list, I think it's a little bit shorter, because Samsung is mostly self-contained in terms of its suppliers. Samsung is so directly integrated that it makes most of the components that go to its phones. It still has some third-party part suppliers. But as far as supply relationships go that might suffer from reduced unit volumes, it's mostly going to be within Samsung itself. Qualcomm (QCOM 0.73%) probably loses a little bit because the Snapdragon 820 is inside the U.S. variants...

Lewis: Can you explain what the Snapdragon does?

Niu: Snapdragon is the main applications processor that has integrated modem and all these things. It's one of the most part and pieces of any phone, the processor. Samsung, what they do is they have all these different variants for different geographies. Samsung has been trying to ship to its own in-house Exynos processor. I think the last year, they were exclusively Exynos, with no Snapdragon, but this year, Qualcomm has gotten back into the mix, they've improved their chips a little bit and got more competitive. There's some variance for different geographies, and Qualcomm is in the U.S. variance. So, they'll lose a little bit, since they obviously won't be selling into this phone anymore. But there's kind of a hedge, because Qualcomm does sell a lot into Apple (AAPL 0.64%). If people buy iPhones instead of the Note 7, probably incrementally negative to Qualcomm, but they're not totally out of the picture.

Lewis: Right, you might be a little pinched, but nothing crazy.

Niu: Right, there's a little bit of a hedge, there's a silver lining. And of course, it depends on which iPhone you get, because not Qualcomm has lost a little bit of spot in the iPhone, because Qualcomm used to be the exclusive modem supplier, and for the first time ever, Apple has gone to Intel -- well, first time not including Infineon 10 years ago. Now, this year, Apple is now buying modems from Qualcomm and Intel, depending on which phone you get. As far as pure winners, I would say certainly Apple.

Lewis: Yeah, I think they're up 10% since some of the products issues around the Note 7 surfaced. The market certainly seems to think...

Niu: Yeah, there was already iPhone 7 optimism, and now the shares just keep going higher. They're at 2016 highs because of all this stuff that's going on with Samsung. I think it's pretty clear that a lot of people are probably going to try. And we've already been seeing Android switching rates continue to rise every quarter. Apple touts this every quarter, every quarter they're like, "Highest Android switcher rates ever." I think that trend is going to continue, particularly with one of the biggest Android OEMs hitting into this wall here.

As mentioned, Intel is now in some of the iPhones. So Intel, to the extent that people are buying the phones with their modem, they benefit. Taiwan Semiconductor (TSM 2.84%), I think, is a big winner here too. They actually just released earnings that were pretty strong. Taiwan semiconductor is producing Apple's A10 Fusion chip. Another change this year is that, in prior years, Apple had been dual sourcing its chip manufacturing from both Samsung and Taiwan Semiconductor, which started one or two years ago. They only brought on Taiwan semiconductor one or two years ago. But now, supposedly, with all the indications that we're getting, it's exclusively to TSMC, which is a huge win for them and a huge blow to Samsung, in terms of the foundry business on the chip manufacturing side. That's a lot more chips that Taiwan Semi is going to be making for Apple. They just released earnings, it was pretty strong, came in above expectations. I don't remember the exact numbers. But the important thing is that Taiwan Semiconductor raised fourth quarter guidance, and that raised guidance did not factor in the possibility of these other phones being discontinued. So they were already super bullish, even before factoring in the Note 7's discontinuation into their forecast. So, I think they're really going to bank this holiday quarter if Apple sells enough phones. That's a ton of orders going to TSMC to make these A10 Fusion chips. I think they're probably a pretty big winner here.

Lewis: Yeah, I think a lot of people tend to read into the commentary we get from component manufacturers that go into the iPhone as a general baseline for how that segment might be doing when Apple reports again. If you're seeing guidance up from Taiwan Semiconductor, that probably bodes well for the iPhone business.

Niu: Yeah. And even before the Samsung Note -- that's what blew me away -- their guidance was so strong, and they literally said, "This does not include any impact if the Note 7 is discontinued," which it has been. So, it looks really good for them. As far as third-party carriers or retailers are concerned, I think they're pretty ambivalent. They're just trying to do their best to help their customers not be in danger. Their brands aren't going to be affected, and they're not going to be bearing a lot of cost because Samsung is going to be paying for all of this. So most of the retailers and carriers just want to do what's right for the customer and get these things off the market. I don't think there's going to be any damage to them.