Apple has been synonymous with the word innovation but what is its future and, specifically, its struggles against a top tier competitor? How well does the future of Apple (AAPL) stack up to its rival, Samsung (SSNLF.PK)? After doing some in-depth comp analysis this past week, I believe Apple's share price is not fully justified relative to its financials. However, Samsung is better positioned for growth and has greater upside potential.
Apple's Intangible Assets Vs. Samsung's Unprecedented Rise
From creating and designing computers to delivering the iProducts, Apple has come a long way. It has placed itself in the most redefining moment of our generation; Apple is at the epicenter of the technological revolution era. The company has an intangible asset that puts it in the forefront of the minds of consumers and investors alike. But now, Apple faces its biggest threat as Samsung has slowly gained market share. In 2012, Samsung sold 63 million units of the Samsung Galaxy and made more money than Google (GOOG) makes from all its businesses.
Despite this, Samsung is still nowhere near Apple's ability to generate revenues. Apple has sold 5 million iPhone 5's in a weekend, and will probably continue to outsell Samsung's Galaxy phones for some time. However, it's not longer safe to say that Apple will forever remain the leader in the smartphone market.
Tim Cook as the Commander-in-Chief in a Stormy Tax Battle
Obviously, the tax debacle has been a hot topic and covered well through other articles. However, it can't be overstated just how important it has been for Apple. There had been a lot of speculation as to whether the newly appointed CEO, Tim Cook, could continue the legacy of Steve Jobs. Little by little, investors and hedge funds had been losing confidence in whether Apple was still capable of delivering the product designs that once made it the pinnacle of innovation. The legal proceedings of Apple against Samsung didn't help the company. But recently, Tim Cook was able to steer his company away from the issue of Apple taking advantage of tax law loopholes by successfully defending the company and pushing Congress to overhaul the tax code. The general consensus on Wall Street was that Cook looked like a capable leader that can, once again, instill confidence in investors - a much needed plus for Apple.
Key Financials Comparison
Year-on-year (as shown above), Apple has been able to grow its revenues from $108.2 billion USD to $156 billion. This nominal amount is an incredible increase; however, Samsung's revenue growth (shown below) is nothing to sneeze at.
Apple still beats Samsung's earnings growth (earnings-per-share shown below); however, earnings growth doesn't necessarily translate to share price growth. A look at the last year's performance of both stocks clearly details this: Samsung is up 10.5%, while Apple is down 26%. A recent poll of 42 analysts covering Samsung (as reported by the Financial Times) estimated an average 12-month share price growth forecast of 50.2%, with a high of 107.2% and a low of just -2.3%. Compare this to Apple's analyst forecast (as reported by CNN Money) of a median of 4.8%, with a high of 31.4% and low of -27.8%.
Of course, analyst estimates must be taken with a huge grain of salt. However, analyst forecasts can tell us one important thing; specifically, a wide range between negative and positive outlooks tend to indicate future volatility. In which case, there is no comparison between the risk outlooks between these two stocks.
One area, often overlooked, in which Apple has remain superior is the ability to control expenses. Apple was able to reduce the percentage of sales devoted to COGS from 59.52% to 56.13%; whereas Samsung has remained flat.
Ratios and Margin Comparison
Apple's ROA and ROE are currently standing at 18.91% and 33.34%, respectively. Samsung posts slightly more modest numbers, at an ROA of 15.4% and a ROE of 20%. In both cases, the ratios are above industry averages, but what makes them more meaningful is that Apple's capital structure uses very little debt. This is an area that has been troubling Samsung's investors. Samsung's most recent debt-to-total capital ratio stands at 9.08%, a sharp increase from the previous year's 5.46%. However, in terms of operational efficiency, Apple is one of the industry's worst with their 19.32 days accounts receivables worth of sales outstanding. This is because of Apple's partnerships with different data service provider providing different and less strict payment and credit policies.
Samsung's Rise Is Not A Flash-in-the-Pan
I believe Apple has been approaching fair value. Whether you are an Apple believer or not, it can't be disputed that the company posts incredible gains year-on-year, maintains a very healthy balance sheet (managing to grow their $145 billion USD cash pile) and produced $50 billion cash flow from operations last fiscal year 2012. It's not as if Apple is a sinking ship; rather, it's a function of whether this value is already priced into the stock. Samsung's rise will continue to hammer at Apple's price. Apple's limited number of new product initiatives (at least those mentioned to the public) aren't the game-changers of previous years.
So, how does an investor gain access to Samsung? The company is not listed on a U.S. exchange and does not have an ADR. You could buy OTC; however, fees may make this prohibitive. Rather, the most common option is to buy into a South Korean focused ETF or Fund. As Samsung is responsible for a fifth of its country's GDP, a broader fund will give the average individual investor plenty of exposure. For the foreseeable future, Samsung will continue to make its presence felt, which, by itself, is enough to keep me away from Apple.