Please ensure Javascript is enabled for purposes of website accessibility

Samsung's Galaxy S8 Success Will Come at a Cost

By Evan Niu, CFA - Apr 21, 2017 at 10:15PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

And what it means for Apple.

By all indications thus far, Samsung's newest Galaxy S8 looks like it's going to be a massive success. The new flagship handset has a striking and unique design that sets it apart from anything Apple (AAPL -1.80%) has done, and the company played it conservatively in terms of the battery specs in order to ensure that the Note 7 debacle doesn't repeat itself. The Note 7's explosive tendencies were in part tied to Samsung pushing the envelope with the battery's energy density. The Galaxy S8 may very redeem the South Korean conglomerate's brand in the eyes of consumers.

Assuming nothing goes wrong in the coming months, that success could come at a cost, as the Galaxy S8 promises to be one of 2017's best-selling phones.

Galaxy S8 and S8 Plus

Image source: Samsung.

Component costs are going up

IHS Markit has just released preliminary estimates on the bill of materials (BOM) for the Galaxy S8. Spoiler alert: It's expensive. The BOM totals an estimated $301.60, which is meaningfully higher than any previous Galaxy device. That figure is before you include other costs, such as manufacturing or licensing royalties. Tacking on another $5.90 in manufacturing costs brings the total to $307.50. Compare that to other flagship Galaxy phones, as well as IHS Markit's estimates for the iPhone 7 from last September:

Device

Estimated BOM

Galaxy S8

$307.50

Galaxy S7

$264.16

Galaxy S7 Edge

$271.21

iPhone 7

$224.80

Data source: IHS Markit.

The Galaxy S8 starts at $720. IHS Markit notes that the Galaxy S8 is the first handset that has the technical capabilities to deliver gigabit speeds over LTE. While the market researcher doesn't break out the display costs in its release, display assemblies are often the most expensive component, and Samsung's new "Infinity Display" very likely contributed significantly to the increase. The device starts with a generous 64 GB of storage and 4 GB of RAM, further adding to the BOM, representing about $41.50.

Taking the battle upmarket

Given the Galaxy S8's strong critical reception thus far, there's quite a bit of pressure for Apple's 10th-generation iPhone to be a blockbuster, as Samsung has now raised the bar. IHS Markit director Andrew Rassweiler notes that BOM costs are trending up, which "reflects something of an arms race in features among Apple, Samsung and other phone manufacturers, as they all try to add new and distinguishing hardware features."

One of the most widely held expectations for the 2017 iPhone is a high-end model featuring an OLED display that could cost upwards of $1,000. Given the aforementioned disproportionate impact on costs that displays have, Apple's first adoption of OLED technology will also drive up the component costs of the "iPhone 8" or "iPhone X" or "iPhone whatever-Apple-calls-it." Since Apple has much more aggressive margin targets than its frenemy, any increase in costs should translate into an even higher price point relative to Samsung's pricing strategy. (Hence the possibility of a $1,000 price tag.)

At a time when average smartphone prices continue to trend lower, Apple and Samsung are taking their battle even further upmarket.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
AAPL
$136.72 (-1.80%) $-2.51

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
317%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/30/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.