Samsung's Smartwatch Underwhelms

Sep.25.13 | About: Samsung Electronics (SSNGY)

By RJ Towner

The day many had been waiting for in tech came as Samsung unveiled its long-rumored smartwatch, dubbed the "Galaxy Gear," to the public. The Galaxy Gear acts as a compliment to a smartphone, allowing users to check text messages, phone calls, and e-mails, as well as set alarms, run apps, and check the weather. The smartwatch will supposedly integrate seamlessly with the upcoming Galaxy Note III, and it will retail for $300.

The Market Isn't Big Enough at Launch

Our first issue with the Galaxy Gear is the miniscule addressable market at launch. Though the device will eventually be compatible with the Galaxy S IV and other Samsung smartphones, it will only work with the Note III at launch. The Note III, being comically large for the average person, does not have the same market potential as the Galaxy or an Apple iPhone (NASDAQ:AAPL).

If consumers don't immediately begin purchasing the Note/Gear combo, Samsung's smartwatch could be doomed from the start. As much as companies would love to cite marketing and clever advertising as demand drivers, oftentimes the best form of advertising is seeing another person using a product. Samsung might entirely miss this phenomenon.

$300 is Steep

Though premium smartphones from Samsung, Apple, and even Google's Motorola (NASDAQ:GOOG) can retail well above $500-$600, we're not sure how consumers will respond to $300 for a complimentary piece of technology. The Nike Fuel Band retails for considerable less at $150, and the highly-customizable Pebble Watch also sells for $150. The Fuel Band is more limited in its scope, but at $150, we think the Pebble looks like a significantly better value.

Is It Enough?

The Galaxy Gear has some interesting specs including a 1.9 megapixel camera, 4GB of internal storage, built-in speakers, and an 800 MHz processor. These specs sound great, but the amount of technology packed into the device causes poor battery life of one day-significantly worse than peers. Initial reviews have deemed the device sluggish and difficult to charge.

Rumors regarding the iWatch seem to suggest Apple will pack a ton of sensory technology into the device, something that Samsung didn't emphasize. For a smartwatch to be successful at a premium price, we think it should be undeniably better than the competition, and the Galaxy Gear does not quite seem to fit the bill.

Qualcomm in the Smartwatch Battle

Qualcomm (NASDAQ:QCOM) made a somewhat surprising announcement of its limited edition Toq smartwatch. The Toq seems like a solid device, not all that different from the Pebble, save a different display. The device contains wireless charging and decent battery life, but to be frank, it does not appear aimed at mass market success. Rather, it appears Qualcomm is interested in demonstrating its technology so that future smartwatch makers are comfortable using Qualcomm's components. We do not view this product as a major player in the smartwatch space.

Valuentum's Take

The Galaxy Gear offering simply isn't strong enough for us to declare Samsung the winner of the smartwatch war and pronounce the iWatch dead on arrival. In fact, we simply aren't very impressed by what Samsung will bring to market. The combination of the high price, small addressable market, and lack of product differentiation is almost enough for us to declare the Galaxy Gear a bust. Some have even of accused the Galaxy Gear of not really being a smartwatch.

Overall, the Galaxy Gear will have no impact on our investment thesis for Apple, which we continue to hold confidently in both of our actively managed portfolios. If anything, the lackluster showing from Samsung makes the potential of the iWatch even greater.

Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: RJ Towner is Director of Research Development at Valuentum. AAPL is included in our Best Ideas portfolio.