Here's something you don't see every day: Apple (NASDAQ:AAPL) posting strong gains while the market lags. Days like this have been few and far between over the past several months. Who does Apple have to thank for this rally? Samsung.
The South Korean conglomerate unveiled its newest Galaxy S4 last night at an enormous media event in New York City. The debut has been one of the most widely anticipated consumer product launches in months, as Samsung has been very aggressively building hype for the device primarily through an unrelenting marketing campaign that ensures the word "Galaxy" is never far from the consumer eye.
Much like the iPhone 5, the Galaxy S4 didn't have any major surprises for consumers and investors, as quite literally all details were leaked in advance in some form or fashion. Both devices are now the current flagships for each respective company, and will garner their fair shares of smartphone sales over the coming months.
The reason why Apple investors are feeling confident today is that the Galaxy S4 may not be able to live up to the hype. That's the downside of an overt attempt to artificially drive anticipation, since it can potentially lead to feelings of disappointment. The Galaxy S IV simply isn't as big of an improvement as Samsung had led us to believe it would be.
Only Apple can pull off an Apple
There have been countless ways that Samsung has been copying Apple in recent years, and the Galaxy S4 is indicative of yet another way: incremental upgrades. Over the past six years, Apple has very successfully implemented a tick-tock strategy with iPhone upgrades, borrowing the strategy from Intel's arsenal.
The Cupertino company alternates major redesigns with incremental improvements each year. The most impressive part? This strategy simply shouldn't work in the high-flying and cutthroat smartphone market. In a world where most smartphone designs become dated in a matter of months, Apple is able to milk two years from a single external design without consumer fatigue. Apple has been able to execute this through a combination of higher build quality, robust app content, brand strength, and software differentiation.
Samsung, on the other hand, is still mostly a commoditized Google (NASDAQ:GOOGL) Android OEM. It has less strategic leverage to pull off such a move, as there is an army of OEMs lining up behind it all eager to take the Android crown. "Differentiated" software layers like Samsung's TouchWiz will only go so far, though Samsung's sheer size and marketing budget has become an important competitive advantage. After all, not every OEM can roll out to 327 carriers in 155 countries around the world in a matter of months.
Still, the market's tolerance of incremental upgrades will be much lower for a commoditized player relative to a differentiated company, and investors are optimistic that Samsung's new threat won't be as significant as feared.
Word on the Street
Piper Jaffray analyst Gene Munster considers the S4 to be an incremental upgrade, with spec bumps mostly in line with expectations. The display, camera, and processor were already mostly known quantities and Samsung's efforts to push new software features aren't quite game-changers, either. Munster considers Siri on iOS as and even Google Now on Android as more powerful features relative to what Sammy showed off last night.
His estimates are unchanged and expects Apple to keep a roughly 40% share of the high-end market this year, and still expects the company to sell 177.5 million iPhones in 2013. Munster doesn't believe that the Galaxy S4 will hurt iPhone sales, but it could easily win more Android sales.
Topeka Capital Markets analyst Brian White believes Apple's upcoming "iPhone 5S" will trounce the Galaxy S IV when it launches in a matter of months. The S4 is still less refined than Apple's build quality, in part because Samsung continues to use a cheap plastic casing that White considers "no match" to the iPhone 5's aluminum unibody chassis.
White notes that the popular perception is that Samsung is absolutely crushing Apple in the smartphone market, a notion that he considers "complete nonsense." It's true that Samsung has become the top vendor worldwide, but most of those gains are in low-end emerging markets, not high-end flagships.
To be fair, there are also analyst bears, too. Jefferies analyst Peter Misek thinks the device is an "incremental negative" for Apple, and Nomura analyst Stuart Jeffrey sees the S4 potentially helping Samsung overtake Apple in the high-end segment.
Judging by Apple's gains today, investors obviously aren't too impressed with the Galaxy S4, either.