Samsung (NASDAQOTH:SSNLF) recently announced that it expects its first quarter operating profit to decline 30% year over year to 5.9 trillion won ($5.4 billion). That drop is steep, but it represents an improvement from the 36% year-over-year decline it reported last quarter. Revenue is expected to fall 12% to about 47 trillion won ($43.2 billion).
Samsung will report its full first quarter earnings later this month, but those preliminary figures indicate that its bottom line declines are slowing down. Does this mean that Samsung could finally recover lost ground against Apple (NASDAQ:AAPL), Xiaomi, and other rivals later this year?
How Samsung could bounce back
Samsung's global market share of smartphones fell from 29% to 20% between the fourth quarters of 2013 and 2014, according to IDC. Apple nullified Samsung's big screen advantage with the iPhone 6, while lower-margin rivals like Xiaomi undercut Samsung's mid-range devices. As a result, Samsung's mobile profit plunged 64% year over year in the fourth quarter.
In the high-end market, Samsung's S5, which launched last year, was widely criticized as being too similar to the S4 from 2013. Speaking to The New York Times, BNP Paribas analyst Peter Yu also noted that if Samsung's brand was covered up, users "couldn't tell the difference between the Chinese smartphones and the Samsung smartphones."
The Galaxy S6 certainly breaks the S4/S5 mold with its sleek metal casing, while the S6 Edge stands out further with a three-sided curved screen.
That strategy might help the S6 sell more units than the S5, which failed to outsell the S4. Samsung sold 12 million S5 units during its first three months on sale in 2014, compared to 16 million S4 units in 2013. According to South Korean news outlets, Samsung has already sold 20 million S6 units in advance to carriers. Yu (the BNP Paribas analyst) expects Samsung to ship 44 million S6 devices this year, compared to 38 million S5 devices in 2014.
In the low to mid-range markets, Samsung has been criticized for launching too many devices at once. In response, it is consolidating that market with a single series, the Galaxy J, to compete more effectively against rivals like Xiaomi and Micromax.
Why Wall Street believes in Samsung
Analysts polled by Thomson Reuters expect Samsung's full-year profit to rise 6% year-over-year -- a big reversal from the annual earnings decline that they projected earlier this year. Those rosier projections are based on stronger S6 sales projections, a clearer mid-range strategy, and strong semiconductor sales.
Analysts expect Samsung's semiconductor business to return to profitability in the second half of the year. The semiconductor unit provides Samsung's new devices with its home-grown Exynos processors, which are replacing Qualcomm's Snapdragon chips. Samsung will also manufacture new chips for NVIDIA and supply Apple with A9 chips for the next iPhone.
Why Apple probably isn't worried
Forecasts for Samsung look brighter than before, but there's no reason for Apple investors to panic. The success of the S6 and S6 Edge hinges on the notion that fresh, aesthetically pleasing designs will win back users. Although some users might fall into that category, that theory doesn't address Samsung's other problem: it lacks Apple's high-end appeal.
A recent survey by the Hurun Research Institute in Shanghai found that Apple was the top brand for gifting among China's richest men and women, topping luxury brands like Louis Vuitton, Gucci, Chanel, Dior, and Hermes. Apple was the only electronics company on the list. That robust status appeal could make it tough for Samsung to win over affluent customers.
Another problem is that Samsung users can easily switch to rival Android smartphone makers because their Google Play purchases remain valid. Apple, however, "locks in" users by controlling both its hardware and software ecosystems.
The bottom line
Samsung's fate in the high-end market hinges on a single question: can high-end Android devices survive the commoditization of the Android market?
If they can, the S6 and S6 Edge could help Samsung make a comeback against Apple in the high-end market. But if not, the only solution for Samsung is to establish its own mobile operating system -- which it has struggled do with Tizen. In the low and mid-range markets, it could get stuck in a race to the bottom to preserve market share as margins crumble.
Therefore, investors should take these reports of Samsung's "turnaround" with a grain of salt. Slowing year-over-year declines are encouraging, but the success of the S6, S6 Edge, and Galaxy J series are hardly guaranteed.