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Samsung Probably Lost Share to Apple

By Ashraf Eassa - Jan 8, 2014 at 6:00PM

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With a disappointing earnings forecast from Samsung, it's looking like the South Korean giant is losing share to Apple.

In an interesting turn of events, Samsung (NASDAQOTH: SSNLF) reported some pretty ugly guidance for the final quarter of 2013. Keep in mind that an "ugly" quarter from an operating profit perspective means operating profit of roughly 8.3 trillion Korean won at the midpoint (or about $7.8 billion), but this was below even the most bearish sell-side expectations of 8.8 trillion won. What's happening here is likely a double whammy: share loss to Apple (AAPL 2.14%) and slowing high end of the mobile market.

Samsung share loss to Apple
Samsung has spent an enormous amount of money on marketing its mobile products -- about $14 billion for the year. This budget, coupled with an aggressive push into many variants and form factors, has allowed Samsung to capture nearly as large a piece of the mobile profit pie as Apple has (while other players like HTC and Motorola continue to lose money).

However, it seems that with Apple on top of its game with the Retina iPad Mini, iPhone 5s, and iPad Air, the Cupertino giant is winning back share that it had previously lost to Samsung. Further, this phenomenon could get worse if, or when, Apple rolls out its rumored iPhone Air large-screen phone to take further share from Samsung's Galaxy Note products.

The high-end market is slowing down
Interestingly, while Samsung seems to be losing share to Apple at the very high end, another force working against the company is the dramatic slowing of high-end growth in the handset market. With this portion of the market slowing, and with Apple taking back share, Samsung's exposure to the mobile market is increasingly at the low end.

There's nothing wrong with the low end for a company like Samsung, but it does mean that the obscene profitability that the smartphone boom initially drove could come to an end. Further, if Apple is successful at sewing up the high end, Samsung will suffer some real margin compression.

The question is now at the low end
At CES, Intel partner ASUS launched a new line of phones known as the ZenFone, which ranged from $100-$200 without a contract. The phones ran Android and actually looked like a pretty interesting value. If more traditional PC vendors start going all-in on smartphones, and if the market fragments as the PC market has, then Samsung's main profit drivers could be in trouble -- although this really is a longer-term concern.

Foolish bottom line
It looks as though the same phenomenon that hit Apple (a contraction of profitability) back in 2012 is beginning to hit Samsung in early 2014. While the smartphone as a category has been hot and flashy, and while there is a very lucrative high end for Samsung, the risk from Apple at the high end (and from smaller players at the low end) is very real. This is why Samsung trades at roughly seven times earnings -- the risks to that profitability are simply enormous longer term. 

Ashraf Eassa has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. 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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