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Vinay Singh
Vinay Singh
Articles (229) 

Samsung Is Taking a Big Risk That Makes It a Risky Investment

May 17, 2014 | About:

Samsung (SSNLF) is facing increased scrutiny from Apple (NASDAQ:AAPL) and is concerned about its own over-reliance on Google. That's left it with few choices, so it's increasingly looking to go it alone, a risky proposition.

Friends and Enemies

Samsung and Apple became close friends when the Korean giant stepped up to provide key parts for the iPod. As that product grew in popularity, so too did the relationship between the two partners. When the iPhone came out, Samsung's involvement was a given.

Since that time, however, Samsung has brought out its own competing products. They look remarkably similar to Apple's iPhones and iPads. They are the only truly competitive offerings to Apple in the market, which recently announced that it would start to shift some of its chip needs to a new supplier. Although the two will continue to do business, it's clear that Apple wants to diversify away from a partner that is also a competitor.


Google's Android mobile operating system is the foundation on which Samsung has based its most popular products. However, that's a big risk, since Google is also in the cell phone space and is increasingly creating other devices, too. To that end, Samsung is set to launch its own mobile OS, called Tizen later this year. That's a risky bet to make at a difficult juncture for the company.

Going it Alone

Nokia tried to create its own OS and failed. It essentially gave up on the effort and, instead, partnered with Microsoft to create a Windows Mobile based phone. The Lumia has been well received, but hasn't sold particularly well. That's one reason to avoid Nokia, which has been shedding market share for years in developed markets and faces a long road to turn things around, if it can.

Revenues falling since 2007, losing money in each of the last two years, and eliminating its dividend to help shore up its finances are other good reasons to stay away. It's also a warning for Samsung that building your own OS is hard to do and even if you do build it, it could be hard to get customers to use it.

Installed Base

One Advantage that Samsung has over Nokia and Microsoft in this effort is a massive installed base of customers. Since so many people know Samsung's Galaxy line as the “hot brand,” getting users to try out Tizen may not be as hard as Nokia trying to win back customers. However, if Tizen disappoints, Samsung could have a public relations nightmare on its hands.

Apple, which has been shifting away from its reliance on Google, too, incurred the wrath of the markets when its maps application couldn't competently replace Google Maps. Although that didn't hurt sales, which continued to grow at an impressive clip despite the Maps gaff, an entire operating system is a different issue. That could quickly turn customers off from Tizen products and, perhaps, the Samsung brand.

Getting a Beatdown

Some of these concerns are behind the recent price drop at Samsung. Although the company remains wildly profitable and is a leader in the device space, investors shouldn't get underneath this falling knife. Apple's decline is a clear demonstration of how bad the market can overreact on both the upside and downside.

For example, Apple shares are now some 40% below their peak. Although the company has its own set of issues to deal with, its price to earnings ratio is only about 10 and it sports a yield of around 2.9%. The big price drop and notable yield provide a nice support for the shares. In fact, Apple is looking like a value stock.

Big Changes, Fickle Market

Investors considering an investment in Samsung might be better off with Apple shares. Investors can be very fickle and Apple's bad news has already taken a toll on the shares. Samsung is taking a big risk with its home-grown OS while seeing slowing demand, which could turn ugly fast for shareholders.

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GuruFocus has detected 5 Warning Signs with Samsung Electronics Co Ltd $SSNLF.
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