I am a large pessimist on Samsung ELECT LTD(F) (OTCMKTS:SSNLF) devices, and to be honest no investor should ever want to expose themselves to the risk of owning this company. Recently Reuters reported,
Analysts say sales momentum for the high-end version of the S4, which became its fastest selling smartphone since its launch in late April, has slowed. “Sales of high-end handsets are lagging behind expectations while low- to mid-end handsets are selling briskly worldwide,” said Kim Young-chan, an analyst at Shinhan Investment Corp.
Disastrous consequences
The problem Samsung ELECT LTD(F) (OTCMKTS:SSNLF) faced initially was trying to create an operating system that would garner mainstream appeal. At some point, Google Inc (NASDAQ:GOOG) came along and helped out the ailing company and the remaining handset manufacturers by providing a unified platform that could directly compete with the Apple Inc. (NASDAQ:AAPL) iPhone.
Initially it went according to plan, with Samsung ELECT LTD(F) (OTCMKTS:SSNLF) focusing on designing certain elements of the phone while outsourcing the semiconductor aspects of the phone to other companies. Soon the company came up with some of its own designs, before opting to go with Intel Corporation (NASDAQ:INTC) Silvermont platform for tablets. This more or less proves that Samsung packages devices, slaps on its brand, and forces the products through distribution. The company doesn’t do a whole lot to add to the value of the products by inserting in new technologies that could be game changing.
Some could point out that the company has control over its assembly line, and the speed by which it updates its product cycle. If each product is just an updated screen size with more RAM, faster processor, and slight improvements through Android OS versions, what would serve the purpose of buying another Samsung ELECT LTD(F) (OTCMKTS:SSNLF) phone? The company doesn’t even try to market itself as a brand having aspirations, but rather takes an approach of being “different” from the people who stand in lines in front of a store.
Samsung is frowning upon one of the world’s most successful retail strategies on planet earth with TV ads that are known to be a waste of marketing dollars. Apple Inc. (NASDAQ:AAPL) is much better at marketing than Samsung ELECT LTD(F) (OTCMKTS:SSNLF). Samsung tried to put on a smear marketing campaign in an attempt to win an audience that is trying to be different from the mainstream. But what if being mainstream is becoming the only stream by which the river is starting to flow. What then will Samsung do?
The statistics look grim
Source: Piper Jaffray
The data indicates that at least 68% of teenagers will most likely opt for a phone that’s not going to be an Android phone. Samsung ELECT LTD(F) (OTCMKTS:SSNLF) is a part of the Android ecosystem, so losing more than half of the teenager demographic indicates that the company’s product strategy is starting to fail.
Google Inc (NASDAQ:GOOG) was successful at creating a strong product ecosystem of OEMs. The company’s greatest weakness is that has virtually no control over mobile products outside of updating Android, and managing the Android Play Store, which generated $2.2 billion in revenue in the first quarter.
The company cannot move the direction of its ship in any sort of way that could rock it by much, putting the company in the position of further optimizing the cash cow and hoping that the handset manufacturers come up with something big or unique to keep customers within the Android ecosystem. But this isn’t likely to happen because every handset manufacturer gets to innovate at about the same rate as everyone else, with the exception of Apple Inc. (NASDAQ:AAPL).
Avoid Android manufacturers
Going forward it should be safe to assume that Apple will generate unit volume growth through both increasing demand in general, paired with the stolen market share from HTC, Samsung ELECT LTD(F) (OTCMKTS:SSNLF), Laclede Group Inc (NYSE:LG), Research In Motion Ltd (NASDAQ:BBRY), and Nokia Corporation (ADR) (NYSE:NOK). Therefore, investors would be sensible to invest into Apple Inc. (NASDAQ:AAPL).
Based on the survey data provided by Piper Jaffray, it would be reasonable to imagine Apple commanding more than 50% of the market share within the United States. This is driven by the fact that the Apple brand generally carries more appeal than Android. Consumers find Apple Inc. (NASDAQ:AAPL) products easy to use, and upgrade.
Investors should stay the course with Apple as it currently trades at a discount relative to the future growth potential and possibilities the company currently exhibits. Analysts are anticipating the company to grow earnings by 20.9% on average over the next five years. Future share buybacks should cause scarcity in the number of floating shares, which would increase the demand for Apple shares. Pair that with a 2.8% dividend for those who need income, along with a 10.5 earnings multiple for value, and we have the all-in-one package.
Conclusion
Investors have every reason to be panicking when it comes to investing into Android handset manufacturers. Companies in the Android ecosystem are becoming increasingly difficult to rely upon, and spontaneous innovation from Android is becoming increasingly unlikely. Investors who want exposure in mobile should stick with Apple Inc. (NASDAQ:AAPL).
Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google.
The article Samsung Could Be in Serious Trouble originally appeared on Fool.com and is written by Alexander Cho.
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