Samsung Still Dependent on the Smartphone

by Brad Moon | July 29, 2013 11:12 am

Smartphones have been the high tech “it” device this decade.

They’ve been the driving force behind the spectacular growth of some players, and some former technology superstars have been seriously damaged by failing to make a splash in the smartphone market. However, the global smartphone market is maturing.

With shipments slowing, average prices falling and competition increasing[1], companies that rely on smartphone profits are taking facing a reality check. Apple (AAPL[2]) has been the poster child for this effect, with enormous iPhone profits driving its stock to $700 last year and concerns over weak demand eroding 37% of its value since then.

You can officially add Apple’s primary competitor and the world’s biggest mobile phone manufacturer — Samsung (SSNLF[3]) — to that club. Sales of its flagship Galaxy S4 smartphone have been weaker than expected, resulting in a $24 billion hit to its market cap since the device’s April release and a 20% decline in its stock price since reaching a high of $1,500 in February.

There are companies that face a very real threat because of their reliance on the smartphone market. BlackBerry (BBRY[4]), for example, is one of those former technology superstars that misplayed the whole smartphone revolution and has paid a heavy price. By focusing on enterprise customers even as consumers drove the explosive demand for smartphones, the industry pioneer let Apple, Samsung and smartphones running Google’s (GOOG[5]) Android operating system dominate the market.

Today, BlackBerry’s stock is down 94% from five years ago, its new BB10 operating system and handsets are failing to stem desertion and with Microsoft’s (MSFT[6]) Windows Phone edging it out for third place in platform market share, BlackBerry’s continued viability is in doubt[7].

Nokia (NOK[8]), while not in as dire straits as BlackBerry, is another former superstar that has fallen on hard times during the smartphone era, shedding 90% of its value in the past five years. The former world leader in mobile phone production tried to push its own Symbian operating system and took a beating as consumers showed a clear preference for Apple’s iOS and Google’s Android.

As if things weren’t bad enough, while Nokia was failing to crack the smartphone market, its feature phone sales began to plummet as the devices fell out of favor. The company eventually threw its lot in with Microsoft’s Windows Phone and has made some progress with sales of its Lumia smartphones[9] in recent months, but remains an also-ran who lacks products other than mobile phones, leaving the company very vulnerable to the softening market conditions.

While Samsung has benefited tremendously from the smartphone market, you might think it would be less vulnerable to threats like price pressure and slowing demand compared to most of the other players. While BlackBerry and Nokia are dependent on mobile phones and Apple has only its tablet business, a declining PC industry and sidelines like iTunes and Apple TV to bolster iPhone sales, Samsung has a huge product range.

The company makes tablets, printers, TVs, home theater systems, camcorders, kitchen appliances and more. On top of that, it manufacturers key high-tech components like LCD panels, semiconductors and flash memory, supplying competitors such as Apple.

In its latest earnings report, Samsung’s mobile division reported earnings that were up by 8% over the previous quarter, yet profits were down 3%[10]. Selling Galaxy S4’s has become more expensive, demand is softer than expected[11], cheaper Chinese smartphones are hitting shelves and competitors from Apple to Nokia are either currently releasing or prepping budget-friendly alternatives to their current flagship smartphones.

All of these factors have hit Samsung’s mobile profits and are expected to make things even worse going forward. As a result, the company’s stock has joined those of other smartphone manufacturers on a downward trend this year.

Samsung’s many other lines of business — particularly those components — have helped cushion the blow. In comparison to the hit Apple has taken, Samsung’s 20% slide from its February high is relatively modest, but it reflects that the company still is very reliant on smartphones for profit. Despite selling virtually everything needed to equip a modern home or office, two-thirds of Samsung’s profit is generated by its mobile division.

With analysts reporting annual smartphone growth expected to fall from 58% in 2013 to just 20% in 2015 amid “smartphone exhaustion”[12] and the Galaxy S4’s sales lower-than-expected performance expected to require a push for release of less expensive (and lower profit margin) models[13], Samsung’s mobile division is likely to see further profit pressure.

The bottom line is that, despite its diversification, Samsung currently remains as vulnerable to market forces as competitors like Apple. The company rode the premium smartphone wave to record highs but as smartphones become more of a commodity, releasing a flagship mobile device like the Galaxy S4 is no longer a guarantee of record sales and resulting gains in market value.

While not quite a “one-trick pony” — thanks to semiconductor and display units that have performed well — Samsung (like Apple) is still hitched to the smartphone wagon.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.

  1. competition increasing:
  2. AAPL:
  3. SSNLF:
  4. BBRY:
  5. GOOG:
  6. MSFT:
  7. BlackBerry’s continued viability is in doubt:
  8. NOK:
  9. has made some progress with sales of its Lumia smartphones:
  10. earnings that were up by 8% over the previous quarter, yet profits were down 3%:
  11. demand is softer than expected:
  12. “smartphone exhaustion”:
  13. release of less expensive (and lower profit margin) models:

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