Combined, Apple (NASDAQ:AAPL) and Samsung (NASDAQOTH:SSNLF) account for more than half of the smartphones shipped globally, and drive most of the industry's profits each quarter. But Samsung has seen profits fritter away for the first half of this year, amid strong competition from low to mid-range devices from Chinese brands. Samsung expects earnings to improve in the second half of 2014 with the release of new smartphones and tablets. In contrast, Apple appears well-positioned to balloon domestic and foreign profits with new high-margin iPhone handsets.

Apple has domestic growth opportunities
Industry analysts forecast smartphone growth in mature markets, including the U.S., to weaken because of oversaturation. Smartphone makers are looking at emerging markets to drive smartphone growth. Does this suggest Apple's iPhone growth may stall in the U.S.?

Research from Motley Fool analyst Evan Niu shows that about 30% of mobile phone users in the U.S. have not yet switched to a smartphone. This fraction of the U.S. market presents Apple with over 72 million potential first-time smartphone buyers, and billions in untapped mobile revenue.

Apple generated nearly two-thirds of revenue outside of the Americas, which includes North and South America. With the given growth opportunities in the domestic market, it can further improve revenues in the Americas geographical segment, which saw second quarter revenues of $14.3 billion, up 2% from a year earlier.

Apple grew its U.S. installed base (consumers who own an iPhone) by 13.4 million from 1Q 2013 to 1Q 2014.
Source: Motley Fool

Apple controlled 45% of the U.S. smartphone market last year on shipments of about 54 million iPhones, according to research firm NDP Group. Samsung edged 2% higher with a 26% share. The Cupertino, Calif. company is set to steal market share with the arrival of the 4.7-inch iPhone 6 in late September, followed by a 5.5-inch phablet iPhone 6 that competes directly with Samsung's Galaxy S5 and Note series.

Apple's high-margin phone business in China
In January, Apple formed a long-term partnership with China Mobile, the world's largest carrier with 787.3 million wireless subscribers, to distribute iPhone handsets and gain a larger share of the Chinese mobile market. Since then, Apple has seen sales and profits surge in Greater China for the first half of this year.

"The addition of China Mobile, coupled with great response to our more affordably priced iPhone 4S, led to an all time quarterly record for iPhone sales in Greater China," Apple CFO Luca Maestri said to investors on the second-quarter earnings call.

Sales in Greater China, which includes China, Hong Kong, and Taiwan, reached record highs of $9.3 billion in the second quarter. Apple plans to triple its retail stores in China over the next two years to capitalize on the growth potential.

Samsung and Chinese brands such as Lenovo, Huawei, and Xiaomi have cut into Apple's Chinese market share, but Apple still controls the profitable end of the market. About 27% of China's market consists of smartphones priced over $500, of which 80% are iPhones.

Distribution of smartphones price ranges in China. The high-end portion of the market has significant Chinese market share. Source: Umeng

Android smartphones dominate the mid-range price segment with 57% of devices under $350. Apple threatens to close the gap in this segment. As newer iPhones roll out, Apple expands its mid-range offerings through older iPhone models to compete and pinch share from Android-powered Samsung and Chinese devices.

Samsung's inventory pileup dents profits
Samsung saw demand for older 3G phones decline ahead of the expected growth of 4G LTE phones in the Chinese market. Weak demand for Samsung's mid to low-end smartphones led to inventory pileups in the Chinese and European markets for the second quarter.

Large channel inventories and promotions for new products raised marketing expenses and dampened overall operating profits for the quarter. Slow growth for smartphones also hurt the performance of its semiconductor and display panel business.

Samsung "cautiously" expects positive results in a seasonally strong third quarter, with high operating profits in its smartphone, memory chip, and display panel businesses. The South Korean company believes pent-up demand for new Galaxy smartphones and tablets will accelerate earnings for the second half of this year.

Bottom line
Apple could substantially grow its U.S. installed base if it can switch feature phone users to iPhone devices. Chinese competitors continue to gain market share in China at the expense of low profit margins, while Apple sells high-margin products and propels cash and profits, which matters most for shareholders. Apple trades at a price-to-earnings ratio of 15.93, below the S&P 500's ratio of 19.51, making Apple shares an attractive investment for a large number of value investors.