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Samsung Is Better Positioned For Long Term Growth Than Apple

November 28, 2013 | About:
One of the leading IT research firms Gartner has released its estimates for the global mobile phone sales during the third quarter of 2013. According to the firm, about 456 million mobile phones were sold in the previous quarter, showing a year-over-year increase of 5.7%. Of these, a little more than 250 million were smartphones whose sales rose 45.8% from the same quarter in 2012. Once again, the South Korean consumer electronics behemoth Samsung (SSNLF) hasretained the title of the world’s biggest smartphone, and the world’s biggest mobile, phone vendor (in terms of units sold). Market Share

In the previous quarter, Samsung was able to extend its lead over its biggest smartphone rival Apple (AAPL). The Korean firm was able to maintain its market share at 32.1%, but the increase in the size of the market translated into a 46% increase in the number of smartphones sold to 80.36 million units. On other hand, Apple’s market share has dropped by 2.2 percentage points to 12.1% as Apple could only manage a 23% year-over-year increase in sales. However, if Apple had released the new iPhones earlier, then the numbers would have been better.

In the meantime, China’s leading PC vendor Lenovo (LNVGY) continues to expand rapidly in the smartphone market. During the quarter, Lenovo’s shipments of smartphones rose 84.5% to 12.88 million units. Unlike other global firms, Lenovo is almost entirely about China’s smartphone market. The company generates around 95% of its smartphone sales in China. This raises question marks over the company’s ability to continue with its growth in the long run.

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Currently, Samsung is busy promoting its Samsung Galaxy Gear smartwatch. While rumors abound of Samsung’s future plans, the company has given a taste of what may come in the coming years in its recent Analyst Day conference.

Strategic Shift

During the conference, Samsung’s management highlighted that the company is not only going to introduce an array of new products in the coming months, but it will go through a significant strategic shift. Samsung has traditionally been a hardware company, but now, it seems to following in the footsteps of Apple by increasing its focus on the software side of business. Samsung will need to grow quickly as currently, it is way behind Apple in terms of software. To achieve this objective, the business is eying inorganic growth through acquisitions. Essentially, Samsung wants to become more like Apple that has dominated the premium/high-end segment of the smartphone market. Moreover, amid the several ongoing legal battles with Apple in different countries and jurisdiction, Samsung has decided to further increase its focus on intellectual property protection, particularly in the early stages of development.

New Products

Samsung is planning to ramp up competition in the tablet market while maintaining its leadership in the mobile phone market. By next year, the business has planned to ship around 100 million tablet shipments by 2014.Meanwhile, Samsung’s smartphone business will capitalize from the robust demand from the emerging markets and the growth of the premium segment. Moreover, the increasing demand for the LTE market by 2017, as highlighted by Strategy Analytics, will provide ample growth opportunities in the next four years. In this period, by 2015, Samsung will improve the screen resolution on its devices to 3,840 x 2,160 (UHD) while the camera resolution would increase to 20Mp. Moreover, the business will bring devices with bendable display as early as 2014 while foldable display will come in 2015.

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Meanwhile, the rumor mill is pointing towards the launch of Samsung Galaxy S5 smartphone that could be equipped with an iris scanner. While the company’s current flagship smartphone comes with software that can recognize the user’s eyes to adjust screen brightness or to scroll on a webpage, however; it cannot be used as a security feature for user authentication. But the new smartphone could change that. Through this feature, Samsung would compete directly with Apple’s fingerprint recognition feature in the new iPhones.

Conclusion

Both Samsung and Apple will continue to battle for the market share and their rivalry will continue to capture headlines. Both companies have a solid foundation and will continue to generate profits in the future. However, I believe that currently, Samsung is in a relatively better position, than Apple, in terms of achieving long term growth over the next several decades.

This is because, unlike Apple, Samsung goes way beyond mobile devices. The company generates around one-third of its profits from outside of phones and tablets and is eyeing significant growth in the rapidly growing $25 billion global lighting market on the back of its LED manufacturing facilities. Meanwhile, Samsung also has state-of-the-art in-house manufacturing capabilities when it comes to DRAM, NAND, displays, application processors and cameras. The company even supplies its apps-processors to Apple. In fact, Apple has to rely on third parties for most of these products. There are several different key areas in which Samsung can grow in the long run. During the Analyst Day, the management pointed out that Samsung is in a good position to deliver annual revenues of $400 billion by 2020.

Samsung isn’t listed under ADRs in any of the major American markets but the company trades on the riskier Grey Market. Samsung also has significant representation in the iShares MSCI South Korea ETF (EWY). Samsung makes up 22.64% of this $4.4 billion fund which includes several other large and mid-cap South Korean stocks such as Hyundai, POSCO, LG and Kia Motors.

Notes:

iShares MSCI South Korea Capped ETF

Samsung Presentation: System LSI Business [Pdf]

Gartner Press Release

Disclosure: This article was written by Sarfaraz A. Khan, with valuable contribution from Gohar Yousuf, research assistant at Half Bridge Business Review. Neither Sarfaraz A. Khan, nor Gohar Yousuf have any positions in the stock(s) mentioned in this article.

About the author:

Sarfaraz A. Khan
Sarfaraz A. Khan is a capital market analyst and finance writer. His specialty lies in energy stocks. He also covers consumer goods, services sector, technology stocks, emerging markets and ETFs. His work appears on TheStreet, Seeking Alpha, Motley Fool and GuruFocus.

Visit Sarfaraz A. Khan's Website


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