As Samsung (NASDAQOTH: SSNLF) became one of the world's most profitable companies from its hugely successful mobile business, it also became a very powerful threat to chipmaker Intel (INTC 0.43%).
Samsung is one of the world's largest vendors of consumer electronics devices. It's also one of the few remaining leading-edge semiconductor logic manufacturers, a DRAM and NAND flash powerhouse, and has in-house chip design teams working on a variety of products.
Samsung, at a glance, looks unstoppable.
However, following Samsung's recent preliminary earnings announcement, it looks as though Intel has now regained the lead against Samsung in a very important way.
The only thing that matters: cold, hard cash
At the end of the day, a company is measured by how much profit it can deliver to its shareholders and how quickly (and sustainably) it can grow that profit.
To that end, it's very interesting to see that Samsung forecasts that it will generate approximately 4.1 trillion Korean won , or about $3.85 billion in operating profit.
Intel, on the other hand, guided to $14.4 billion in sales for the current quarter at 66% gross margin for the third quarter of 2014. Operating expenses are expected to be $4.9 billion. These numbers imply operating income of about $4.6 billion.
That's right: Intel, which primarily sells PC and server chips, is on track to generate more operating profit this quarter than the world's leading smartphone vendor by unit shipments.
What's the big picture?
The Intel thesis hinges largely around continued datacenter chip growth, stabilizing PC chip sales, and an eradication of the losses in its mobile efforts. I think there's still pretty significant upside to the company's overall earnings power if it delivers across these three vectors.
Samsung is a bit trickier. If it can find a way to drive a rebound in its mobile device sales, then the mobile device recovery should be amplified by a rebound in the company's component businesses. However, if Samsung can't find a way to stabilize and eventually improve its mobile device operating margins, then the story could continue to be difficult.
Put simply: I think that the path to significantly increased profitability over the next few years is much more straightforward for Intel than it is for Samsung Electronics. However, in the event that Samsung is able to fix the issues that it's dealing with, it could grow profits much more quickly than Intel will be able to.
What exactly is Samsung's problem, though?
In Samsung's earnings update, it stated that "smartphone shipments increased marginally amid intense competition."
The problem, though, is that Samsung reported a decline in the operating margin of its mobile device business as a result of "marketing expenses related to aggressive promotions and lowered ASP driven by reduced proportional shipments of high-end models coupled with price decreases for older smartphone models."
It's not clear what Samsung can do to "fix" this problem. It seems much more likely that, since the barriers to entry in the Android smartphone market are fairly low, the total profit dollars to be had from selling such devices is simply shrinking.
Intel's got problems, too
Intel's problems are quite a bit different from Samsung's. Intel faces minimal competition in its cash-cow PC business, and while there are many small chip companies looking to compete for Intel's server chip dollars, it's not clear if any of these efforts will be commercially successful.
Intel's biggest issue, in my view, is the uncertainty surrounding the PC market as a whole. Though the consensus seems to be that things are getting better, it's not completely clear how sustainable the recovery will be once the Windows XP end-of-life upgrade cycle has played out.
Its second biggest issue is that it is investing very heavily in developing mobile chips and doesn't quite yet have products that can contribute meaningfully to its top and bottom lines. Intel has signaled that its 2015 mobile product lineup should finally help the financial picture, but until this shows signs of playing out, investors are likely to remain skeptical.
Foolish bottom line
Both Intel and Samsung have problems that they each need to overcome in order to drive improvements in their respective top and bottom lines. However, at this point, I would feel more comfortable in Intel's ability to grow its profits from here than I am in Samsung's.
That said, as Samsung reportedly regains its spot as Apple's chip manufacturer (and more aggressively tries to sign on more foundry clients), and as its memory business continues to prosper, I could see Samsung improving its overall financials during 2015 as long as it can keep its mobile device profits roughly flat year over year.