About

Mitch on the Markets

Mitch Zacks is Principal and Senior Portfolio Manager at Zacks Investment Management

mitchzacks 6:00 AM May 24, 2016 at 6:00 AM

Clash of the Titans: Apple vs. Samsung

image

Since the beginning of the smartphone revolution, there has been no love lost between Apple, Inc. and Samsung Electronics Co. Ltd. They found themselves in a worldwide battle starting in 2010 when Samsung, then an Apple supplier, released a very iPhone-like product in its Galaxy lineup .

Over the years, Apple succeeded in creating a niche market for itself by catering to the quality conscious consumers. Samsung, however, operated with an emphasis on vertical integration catering to the masses at a lower price point. This strategy worked for Samsung as they became the leader in the price-conscious Asian subcontinent and ruled the global smartphone market,  until Apple took over first position in 2014.

As a result, Samsung has posted unremarkable quarterly results the past two years as competitors have stolen market share, especially in key growth markets like China and India. Apple was one of those successful competitors, and during this period they’ve managed to post the highest quarterly results ever by any company (Q1 2015).

However, Q1 2016 saw an end to the Apple’s streak of iPhone-powered sales, when the company reported its first quarterly sales drop in more than a decade. Sales in value terms dropped by 13% to $50.6 billion and, in terms of volume, it was down by 16% (and stood at 51.2 million compared to 61.2 million in the same quarter a year ago). Profits hovered around $10.5 billion ($1.90 per diluted share), down 22% from $13.6 billion ($2.33 per diluted share) same quarter last year.

It was pretty much year-over-year weakness on all fronts, and it represented Apple’s worst quarter since 2007. Q1 2016 also saw the first-ever decline in iPhone sales, which may explain why Apple shares were down some 10% through mid-May (the S&P 500 is essentially flat over the same period).

Samsung, though, delivered strong results for the first quarter of 2016 on the back of sales posted by its flagship smartphones, the Galaxy S7 and S7 Edge. Coupled with this was the streamlining of its mid-to-low end smartphones—which helped the company reduce costs, improve the product mix, and increase sales of OLED panels (just to name some of the advantages). These factors helped the company post very strong numbers by comparison. Revenues grew 5.7% year over year and operating profit for the quarter also jumped 12%.

Bottom Line for Investors

In the last couple of years, we have seen a pattern of Samsung consistently losing market share with each new release of an Apple iPhone. Conversely, Apple’s market share has not been hurt as much with each of Samsung’s new Galaxy S phone releases. Still, recent data suggests that the tide may be turning again, as Samsung’s lower price points and revamped product line may better position it in Asia and other emerging markets (particularly as the economic cycle wears on and wealth is created at a slower pace).

For example, Samsung recently introduced its “S bike” mode on Galaxy phones, a feature for India’s legions of motorbike riders which, when activated, notifies callers that the phone’s owner is riding and cannot answer. This innovation is a testament to Samsung’s sensitivity to its customer base in Asia, and their needs. But, just when you thought that would give Samsung a leg-up in the battle, Apple is soon rolling out their emerging markets-focused phones. May the tug-of-war continue and “the odds be ever in their favor…”  

FREE Download – Zacks Economic Outlook: May, 2016

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

This communication is for informational purposes only and nothing herein should be construed as a solicitation, recommendation or an offer to buy or sell any securities or product, and does not constitute legal or tax advice. The information contained herein has been obtained from sources believed to be reliable but we do not guarantee accuracy or completeness. Zacks Investment Management, Inc. is not engaged in rendering legal, tax, accounting or other professional services. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney- client relationship. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel.

1 note
  1. cameramantan-blog reblogged this from mitchzacks
  2. mitchzacks posted this