Samsung (SSNLF, Financial) is a South Korean multinational conglomerate company headquartered in Seoul. Since its inception in 1938, Samsung has several notable subsidiaries. The most recognized are Samsung Electronics; Samsung Heavy Industries; Samsung Engineering, and Samsung C&T. The company occupies more than 20% of the global smartphone market, but has recently seen severe competitive pressure from the likes of Apple (AAPL, Financial) and Xiaomi. Let us analyze if the company makes for a good investment option considering the current scenario.
Excerpts from the past
Before getting into the details of industry competition, shredding some light onto Samsung's current financial performance might prove to be helpful for investors on deciding whether to purchase the stock.
From the earnings release for Q3 2014, things look quite disappointing and discouraging for Samsung. As can be inferred from the report, the top line declined Q-o-Q as well as Y-o-Y by almost 9.5% and 20%, respectively. Owing to a steep top line decline, Samsung’s bottom line also decreased by 32.5% Q-o-Q and almost 49% Y-o-Y. One of the primary reasons driving this sharp decline is severe competition that the company is facing from the smartphone vendors like Apple, Chinese smartphone makers Huawei and Xiaomi, and others. Data collected by research firm Gartner suggests that Samsung might have remained the king of the smartphone market in Q3 with a 24.4% market share, but this is still a decline from 32% controlled in the previous year.
In the similar period, Apple grew its share from 12.1% to 12.7%, whereas Huawei grew its share from 4.7% to 5.3%. However, the biggest gainer of the lot was Xiaomi, which saw a phenomenal jump in its market share from 1.5% to 5.2% Y-o-Y. In a nutshell, most of the smartphone vendors gained market share by encroaching Samsung’s overall share across the high and low range smartphone markets. Even the latest innovation from Samsung, the Galaxy S5, could not make a mark and improve the market share. As a matter of fact, the flagship model from Samsung saw 40% lower sales than its predecessor, the Galaxy S4.
Scouring for alternatives
The declining market share in smartphone market and increasing competitive pressure from peers has prompted Samsung to look beyond this market and seek growth in other business areas. The Internet Of Things (IoT) happens to be one of those business ideas. IoT is poised to touch every facet of consumers' lives, reducing their time, cost and resources with respect to most daily tasks. This is what Mr. BK Yoon said in an hour-long keynote speech at the Consumer Electronics Show, “The Internet of Things is ready to go.”
By 2017, he said that 90% of Samsung products will be IoT devices. Within the next five years, every piece of Samsung hardware — from air purifiers to ovens — will be an IoT device. Yoon has also stated that the importance of developing IoT and announced that Samsung will invest more than $100 million in the developer community in 2015. Samsung’s Chief Enterprise Innovation Officer Robin Bienfait explained to USA TODAY about Samsung’s plans for worldwide domination of the multibillion-dollar enterprise market. Samsung 360 Services for Business is a portfolio of enterprise technologies from smartphones and tablets to wearables, digital displays and medical diagnostic equipment — all underpinned by strict security solutions. Given that Samsung recently announced its first annual profit decline in three years, the company’s preference towards establishing a presence in the IoT market has escalated.
Besides making strides in the IoT market, the company is also focusing hard on Tizen. For the past few quarters, Samsung has been focusing on large-scale implementation of Tizen OS in its products. Currently, there are rumours that Samsung may be releasing Tizen on all of its 2015 smart TVs. The software simplifies the company's user interface compared to earlier Samsung smart TV operating systems, and it allows users to more easily connect their TV to nearby Samsung smartphones, tablets and smartwatches. Consumers will also be able to watch live broadcast TV on their mobile devices, anywhere on their home network, even when their TVs are turned off. Basically, the company wants Tizen to be the "OS of everything” in the long-run.
Final words
It is true that Samsung has been struggling to sustain its leadership in the smartphone segment, but with rumours of a release date for its flagship Galaxy S5’s successor, the Galaxy S6, there are hopes that the revival may no longer be a pipedream. As for investors, Samsung seems to be in the midst of a churn where it is unsure whether Tizen will be a success or how long IoT will take until fully operational and implemented. In keeping with the mentioned points, it is a better option to watch the stock from the sidelines until there is greater certainty with respect to Samsung’s dreamy initiatives.
