Samsung (NASDAQOTH:SSNLF) recently warned its third-quarter report would be weaker than expected, thanks largely to the extended underperformance of its mobile segment. Specifically, Samsung suffered from lower average unit prices and higher promotional activity for smartphones, which caused sales to decline roughly 20% year-over-year to 47 trillion Korean won. This, in turn, is expected to result in a 60% decline in operating profit to 4.1 trillion won.
Analysts were expecting operating profits of 5.2 trillion won on sales of 50.4 trillion won. It should come as no surprise, then, that shares of Samsung plunged to a fresh 27-month low on the news.
However, Samsung also offered hope for weary investors, saying it "cautiously expects increased shipments of new smartphones and strong seasonal demand for TV products" [emphasis mine] to drive results in the fourth quarter. On the surface that make sense with regard to smartphones, especially considering the impending U.S. launch of Samsung's recently unveiled Galaxy Note 4.
But in the interest of exploring the "cautious" part of that sentence, here are three key reasons Samsung's Galaxy Note 4 may not be able to save the company's fledgling mobile business:
Mind the gap
First, shortly after the Galaxy Note 4 was launched South Korea, some users reported what seemed an early lapse in quality control when a credit card-sized gap appeared between the phablet's display and case. These users understandably worried such a gap could enable dust or liquid to leak into the device.
A Samsung rep later acknowledged the gap, but insisted, "The reported issue does not impact the functionality or quality of the Galaxy Note 4. We assure our customers that all Galaxy Note 4 units meet our strict manufacturing and quality control standards."
Sure enough, as the folks over at AndroidCentral astutely pointed out, Samsung actually calls the gap a "necessary manufacturing feature" in the troubleshooting section of the European Galaxy Note 4 manual. "Over time," the manual states, "friction between parts may cause this gap to expand slightly."
In the end, however, that the gap is intentional almost makes it worse. If today's fickle consumers view it as an unsettling dust trap, it could easily hurt Galaxy Note 4 sales.
There's a new phablet in town
Next, remember this year the Galaxy Note 4 is facing new high-end competition from Apple's (NASDAQ:AAPL) 5.5-inch iPhone 6 Plus. In fact, DigiTimes recently estimated the iPhone 6 Plus accounts for an impressive 60% of Apple's total iPhone 6 sales so far. We already know Apple sold a record 10 million total iPhone 6 units during its first weekend, so -- assuming the 60% estimate holds -- that would mean Apple moved an amazing 6 million iPhone 6 Plus units right off the bat.
By comparison, this time last year Samsung was celebrating the perfectly respectable sale of 10 million Galaxy Note 3's in the first 60 days following its Sept. 23, 2013 release. If the iPhone 6 Plus convinced any meaningful number of Samsung users to jump ship -- and even if iPhone 6 shipments have slowed significantly since its launch -- the Galaxy Note 4 may be hard pressed to outsell its predecessor, let alone provide a significant year-over-year boost to Samsung's entire mobile business.
Lack of differentiation
Finally, when Samsung first provided details on the Galaxy Note 4 last month, it seemed mostly comprised of incremental upgrades. Don't get me wrong: Samsung piled in a slew of improvements including a sharper AMOLED display, a more advanced 15 megapixel rear-facing camera, a better fingerprint scanner, and an improved stylus and related software. But is there anything there to really wow consumers who are looking for something new and exciting?
Of course, Samsung has used its advertisements to repeatedly poke fun at Apple's new offerings for its perceived lack of originality. But Apple has also effectively countered with its "Bigger than bigger" marketing to prove Samsung just can't stem the wave of early iPhone 6 Plus adopters.
If that wasn't enough, Samsung's margins are also seeing continued pressure from lower-priced phones with comparable specs from up-and-coming vendors in key emerging markets like China. According to the latest IDC research, Samsung's global smartphone market share last quarter fell by 7.1 percentage points year-over-year to 25.2%. At the same time, Chinese electronics giants Huawei and Lenovo grew their global slices to 6.9% and 4.7%, respectively, to become the third and fourth-biggest smartphone vendors in the world. Samsung may be able to fight off these vendors with new mid-range phones like the Galaxy A3 and A5, but that still won't help bolster sales of Samsung's higher-priced, higher-margin devices like the Galaxy Note 4.
In the end, this doesn't rule out the possibility that Samsung may, indeed, see improvement in its mobile business as 2014 comes to a close. But given the above headwinds, don't be surprised if the Galaxy Note 4 proves a disappointment.
Steve Symington owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. 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.