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Samsung Says Galaxy S7 Is Exceeding Expectations. Haven't We Heard This Before?

By Jamal Carnette, CFA – Mar 16, 2016 at 12:38PM

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Samsung reports the Galaxy S7 is experiencing stronger-than-expected preorders, but haven't they told us things like this before, only to have the sales data dispute their narrative later?

Image Source: Samsung

Samsung's (NASDAQOTH: SSNLF) Galaxy S7 is experiencing "stronger-than-expected preorders" according to Koh Dong-jin, president of the company's handsets business. While the executive did not provide many specifics, either on preorders or expected sales targets, according to Reuters, this appears to be good news for a company that has struggled with high-end device sales.

Last year's Galaxy S6 was a clear departure from its predecessors. Samsung changed the form factor to one more resembling Apple's (AAPL 1.37%) iPhone line. As a result of the design changes, features Galaxy owners were accustomed to, such as a microSD slot and water-resistant design, were removed. With the Galaxy S7,  Samsung appears to have taken a more incremental approach, and brought those features back.

The question is whether these changes will result in more sales or increased high-end market share. Here's why I'm doubtful they will, despite Samsung's sanguine comments.

Samsung's done this before
Samsung has a history of producing bullish commentary during its devices' early sales periods, only to have outside data later contradict the company's claims. Last year, CEO J.K. Shin reported the Galaxy S6 had "really huge" preorders, going on to state the unit was selling better than its predecessor after its launch in April. Samsung is rather reticent about reporting unit sales, but outside sources expected between 50 million to 70 million Galaxy S6s to be sold in 2015. For any smartphone maker other than Apple, 60 million units is an extremely ambitious target.

Unfortunately, research firm Gartner found Samsung actually shipped fewer  smartphones that quarter than it had the year before, and its market share slipped to 21.9%, versus 26.2% in the prior-year's quarter, when the Galaxy S5 was Samsung's flagship phone. That's all the more shocking because the Galaxy S5 was considered a sales disaster by industry watchers, who estimated the phone sold 40% fewer units than the Galaxy S4. The Galaxy S5 debacle led to a divisionwide shakeup at Samsung, with at least three top executives losing their jobs as a result of weak sales.

In all fairness to Samsung, that it shipped fewer phones overall that quarter doesn't necessarily mean the Galaxy S6 was a flop. It's possible that the high-end device sold well, but that the company lost market share in the low end. Without firm unit numbers from Samsung, one cannot be certain. However, the data seem to dispute this narrative as well. High-end competitor Apple increased its market share 2.4 percentage points on a year-over-year basis that quarter, the highest growth of all vendors listed, which suggests a shift toward Apple's iPhone rather than toward Samsung's Galaxy.

Undefined figures and incremental changes
It pays to be skeptical of company-specific expectations when those expectations are not quantified ahead of time and relayed to investors. Saying "we're doing better than we thought" isn't actionable investing advice. That's especially true when a company has a history of reporting strong preorders only to have market data refute its claims later.

Samsung also faces the additional headwinds involved with bringing an incrementally upgraded model to market. The Galaxy S7's design is similar to the prior-gen unit, though it features an upgraded chipset, and restores the aforementioned waterproof design and microSD slot. In this, Samsung's strategy is similar to that of Apple, which releases incremental "s" model upgrades in the off years between major "new number" redesigns.

The combination of generally slowing growth in the global smartphone market and an incrementally improved device will probably limit Samsung's sales growth. As such, I'd take the company's bullish sentiments with a grain of salt.

Jamal Carnette owns shares of Apple. The Motley Fool owns shares of and recommends Apple. 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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