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Samsung's Galaxy Note 9 Has a Secret Plan to Succeed

By Jamal Carnette, CFA – Aug 12, 2018 at 8:05AM

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Samsung's newest smartphone may not compete head-to-head with Apple's iPhone, but it could help Samsung nonetheless.

Samsung (NASDAQOTH: SSNLF) is gearing up to launch its newest premium smartphone, the Galaxy Note 9. Unlike smartphone competitor Apple (AAPL 1.37%), Samsung typically releases three form factors on two distinct dates: a flagship and larger Plus version usually in the first quarter and the "phablet" Galaxy Note version before Apple's regular September iPhone release date.

Once considered a threat to Apple's iPhone, the most recent iteration of the Galaxy -- the S9 -- has been a disappointment. Although the company is tight-lipped on sales, analysts expect Samsung to ship 31 million units this calendar year. While that figure is significant, it pales in comparison to Apple's 41.3 million units shipped in its most recent quarter alone (fiscal third quarter 2018), typically regarded as Apple's weakest for iPhone sales.

The question for investors is whether the newest Galaxy Note can reverse the company's fortunes. If a recent leaked video is any indication, probably not. However, Samsung could have a secret plan to keep growing its profits.

Woman thinking about money concept.

Image Source: Getty Images.

Samsung's goal may not be smartphone profits...directly

The selling point for the Galaxy Note 9 is storage. A leaked video recently showed the company is planning to offer a version with 512 gigabytes of internal memory; Samsung subsequently confirmed the video's authenticity. Additionally, Note 9 users can increase this figure to 1 terabyte with expandable storage. As a comparison, 512 gigabytes is more than double the figure of Apple's largest iPhone X and more than many versions of Apple's MacBook.

Although Apple and Samsung are the only major premium smartphone vendors, the product has become less important to Samsung's bottom line in recent years. Last fiscal year, the company increased its operating profit 83%, from 29.24 trillion Korean won to 53.65 trillion, with all of that growth generated by the company's device solutions business, which includes the semiconductors and display panels used in computing devices -- including smartphones.

Therefore, Samsung has a vested interest in continuing to increase the average storage per phone across the industry to benefit from its true profit center. The Wall Street Journal found that Samsung made approximately $97 from every iPhone X unit sold on the new OLED display alone, with an additional $13 in other assorted parts and storage it supplied to Apple. Therefore, Samsung can continue to grow its bottom line simply by resetting expectations for higher storage and pricier displays.

Will it work?

Samsung's focus on storage would have been welcomed a few years ago. In 2015, the entry-level Galaxy Note 5 had 32 gigabytes of storage, which was more than twice that year's iPhone 6S iteration. Apple was criticized that year, as it was noted the iOS operating system itself needed nearly 6 gigabytes. Apple increased storage in the entry-level unit to 32 gigabytes the following year.

However, there has been a shift away from downloaded media as streaming video services like Netflix and Amazon Prime Video and streaming music options like Apple Music and Spotify have decreased demand for on-device storage. At the same time, manufacturers have been increasing this figure. Now, both Samsung's newest Galaxy S9 editions and Apple's iPhone X come with 64 gigabytes of storage at the entry level.

While it is my opinion Samsung's Galaxy Note 9 will not lead to a dramatic storage arms race, the company is likely to up the ante for other Android vendors looking to win market share. Even minor improvements would boost Samsung's bottom line: Resetting consumer expectations of entry-level storage from 64 gigabytes to 128 gigabytes would make its semiconductor division millions.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jamal Carnette, CFA owns shares of Amazon and Apple. The Motley Fool owns shares of and recommends Amazon, Apple, and Netflix. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.

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