Friday, 27 April 2012

Galactic earnings report for Samsung

Samsung Electronics reported a massive gain of 81% in net income for Q1 of 2012 on account of surging sales of its flagship Galaxy smartphones, the demand for which increased by 36% to 93.5m handsets. The South Korean company finally overtook Nokia as the worlds biggest handset provider in terms of volume, after more than 14 years. Even though the Finnish company has sold 82.7 million mobiles in the last quarter, a good part of them were lower range.

The battle for smartphone market share

Earnings at Samsung Electronics mobile-phone arm have almost tripled in the last quarter, fuelling much of the growth and compensating for slowing sales in the chip manufacturing business. The operating profit from this business reached $4.9b, further consolidating their grip on the smartphone market. Samsung and Apple are steadily establishing themselves as a close duopoly in the short term, but the market is extremely competitive. Today`s winners can be, and frequently are, tomorrows losers.

A mere few years ago, not many would have contested Nokia`s dominance of the mobile global market, and Apple was just a computer manufacturer. Other market players saw their moments of sunshine and their subsequent declines at a very quick pace: Palm, a maker of personal digital assistance was very popular in the late 1990`s, but they failed to keep up with the rather frequent technological disruptions. Back in the Nokia good ol` days, mobile telephones were heavy, bulky and mainly used for telephone calls. Alarm clocks, calculators or rudimentary games like tetris or snake were regarded as bonus features. Today, a telephone is also a digital recorder, a camera, a video recorder, a multimedia player, an Internet access device, a game player, a controller, a personal assistant, a GPS device, and with the help of a plethora of applications it can be much more.

Samsung and Apple: different business models

The two companies are not directly comparable: their business models, economic status and background, product portfolio, corporate governance and growth models differ significantly. For example, most of Apple`s exploding growth came from massive technological disruptions: it was the first to successfully market on a global scale touch screen mp3 players and mobile phones and later on tablet computers. It was the first to incorporate a fenced environment into all of its devices: all applications, music files, videos and other downloads need to be purchased from their own platform: the iTunes. Samsung focused more on small, incremental technological advancements in hardware and incorporated them into existing products. The evolution of their television from large, heavy and high electricity consuming to slim, efficient and with organic LED screens (OLED technology) is a good example.

The product range is also a major difference when it comes to their business models. Albeit the Cupertino- based electronics marketer Apple has a higher profitability  of 43.95% versus the 32.03% the one of Samsung Electronics as measured by the operating margin, Samsung Electronics is a more diversified company, producing from semiconductors, microcips and OLED displays to television sets, refrigerators, cameras and printers. The wide array of products smooths out the aggregate profitability of the entire portfolio, as some of them are at the beginning of their product cycle and may require vast amounts of initial capital investments (mostly in R&D) and others are at the back end of their product cycles, and therefore act as cash-cows.

Apple`s product base is somewhat less spread out; their product range is composed of sleek personal computers and notebooks - Macs, multimedia players - the iPods and iPads, its current flagship product, a smartphone and the multimedia distribution platform iTunes. Apple TV, which is essentially a way to connect your television to various pay-per-view platforms, launched in March 2007 and is now at its third generation, has had so far limited success. As opposed to Samsung`s conglomerate-type strategy, Apple needs to keep their products at the short-end of the product cycle, constantly develop new products to market or find new markets for their products to keep the growth going.

Sofar, in 2012, Samsung has seen its shares increase by 30% this year, less than the whopping 50% surge in Apple shares. The P/E of Apple is still small at 14.82, for a company with such a high growth, implying that the market participants believe that the growth will slow down in the near future. Samsung Electronic`s P/E ratio is 15.06 also reflecting uncertainties about the sustainability of their huge growth. Charts from Financial Times:

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