Outlook On Apple And Samsung Battle: Lighting To Lead The Way?

Nov.11.13 | About: Apple Inc. (AAPL)

Samsung (OTC:SSNLF) is Apple's (NASDAQ:AAPL) biggest competition, at least in the near term, primarily because Apple's iPhone and iPad market shares eroded in the recent years due to Samsung's equivalent smartphones and tablets. But the two companies have significant differences in terms of product portfolio, technology area leadership, corporate financial landscape and most notably how they will be affected from current and future investor capital. While a company's stock price depends on many variables including near-team trading patterns, its measure is generally indicative of how well the company is expected to do in the future. Sometimes this can be reflected in the forward P/E ratio, but not always because either companies may not have earnings in the near term (typically over the next 12 months) or when earnings are barely positive, it can yield an unrealistically high forwarded stock price. While these aren't the difficulties for the two rivals, it is nevertheless tricky to use Apple's and Samsung's P/E ratios for judging their long-term investment opportunities or market potential for that matter, which remains unclear for investors. This lack of clarity is due to some similar as well as dissimilar reasons for the two rivals and is weighing in on their stock prices.

Apple and Samsung both have strong financials as seen in these approximate numbers:

Apple: Revenue ($160B); Market Cap ($461B); EPS (40); P/E (13); Cash ($160B).

Samsung Electronics: Revenue ($207B); P/E (7); Cash ($50B).

But as seen with other large companies facing commoditization and saturation of their key products, the big question is how Apple and Samsung are going to use their cash to grow or maintain their net income and stay competitive. Without growing their technology moat, particularly with respect to each other and potential newcomers, each stands to lose a great deal because competitors could sweep away market shares quickly even for the "bread-and-butter" products. This of course is investors' longer term concern while their short-term craving happens to be getting some cash or dividend payments from the company's large cash piles. The investors' capital can also matter because it will allow for bigger growth organically and through M&As, both of which are necessities because of the widely varying advanced technologies required to stay ahead of the competition in terms of next-generation upgrades and new products.

Although Samsung and Apple compete for the same smartphone, tablet and other mobile computing device markets, their product realization capabilities are very different. Samsung is by and large a diversified hardware company with its strength in semiconductors and thus enabling it to manufacture a variety of products including smartphones, TVs, refrigerators and washing machines that utilize many of their own electronic and display parts. In contrast, Apple and many other such rivals as Nokia (NYSE:NOK) and HTC (HTC) don't have such product portfolio extension and they outsource their component supply for manufacturing phones and other mobile products. While Samsung considers its in-house hardware capabilities an asset, Apple also has unique strength in software, operating systems, apps, software integration, product designs and IT services. Aside from the well-recognized iPhone, iPad, Mac, iPod and Apple TV - Apple's products and services also include a variety of consumer and corporate software applications, the iOS and OS X operating systems, iCloud and a number of accessory, service and support offerings. Further, Apple also sells and delivers third-party content and applications through its affiliated iTunes Store, App Store, iBookstore and Mac App Store. It has an extensive distribution chain worldwide that includes retail and online stores, with a direct salesforce.

Investors have been edgy about Apple's and Samsung's stock price in recent times. In an effort to come out of secrecy and boost its stock price, Samsung has held two notable meetings with investors in the past two weeks in Seoul, declaring their desire to be more investor friendly as well as some product strategies for the future. Although their commitments include doubling stock dividends and increasing expenditures for more M&As, considering stock buybacks as well as listing of its stock in the US through ADRs, and adding cutting-edge future computing devices with foldable full-color video displays and broadening their software capabilities (here), many still doubt whether that's enough.

Facing similar and added pressures, Apple's cash payout last quarter was $7.8 billion, amounting to 80% of generated cash for 4Q 2013. Apple's added pressure is that they must combat manufacturing and resource challenges for its popular iPhone and iPad products in order to meet consumer demand while maintaining high profit margins. As such, it is broadening its supplier base by adding several new contract manufacturing partners in Asia to boost smartphone and tablet productions. Apple's hardware manufacturing challenges may be the primary reason for delaying the launch of the iPad Mini Retina display, which has higher resolution than HDTV and offers capabilities rivaling desk-top computers.

While such improvements may sound astonishing, Apple and Samsung both rightfully realize that producing profits from the lucrative smartphone and tablet businesses could be diminishing in the foreseeable future. And although esoteric products such as smart wrist watches and foldable screens could help the rivals stay ahead for some time, most believe finding the next "magic" that is still unknown would do the trick.

So what is the next big thing? Most successful behemoth companies of current and the past take advantage of "regular" end consumer purchasing power because that usually provides the biggest sales volume. Following this logic, does anyone think the next big thing may reside in the lighting market? Samsung might think so.

I was at the Samsung press conference in Lightfair in April 2013 in Philadelphia. Lightfair is the biggest annual trade show in lighting and its attendance has been growing significantly every year for the last several years. (here). The general lighting market stands over $300B and is expected to increase greatly since nearly 2 billion people in the world still do not have access to electric light. Samsung was bullish about being a dominant player in the LED lighting market, claiming their product portfolios use better light quality and intelligent wireless controls over others' as they showcased their products in one of the largest booths in the trade show this year. But it wasn't clear whether they understood the inherent LED challenges described in my last Seeking Alpha article (here). Understanding LEDs' fundamental challenges is a prerequisite for developing solutions that can churn out high-quality LED lights with high energy efficiency and long lifespans.

Aside from the glare (too much brightness) problem, the other major headache for LED manufacturers is the poor chip yield, which gives rise to the well-known binning challenge for matching color and other light metrics for same category lamps. The low yield is a great concern for the optoelectronics industry that includes lasers and LEDs because as opposed to silicon, they use compound semiconductors whose material quality varies widely across wafers. In addition, unlike the highly automated electronics industry, LED lamp manufacturing currently requires a great deal of labor-intensive, analog-type light measurements that are not yet suited for volume manufacturing platforms. These ongoing challenges are still preventing LED manufacturers from offering lamps at low cost, which is necessary for overthrowing incandescent and fluorescent lamps. Breaking into the LED lighting business hasn't yet proved to be profitable for many current and former electronic and optoelectronic companies including Philips (NYSE:PHG), General Electric (NYSE:GE), Toshiba and Sharp. It is not clear whether these and other such LED manufacturers as Cree (NASDAQ:CREE), Avago (AVGO) and Nichia maks profit selling LEDs outside of the display market. Still, most of these companies seem to believe that incremental improvements in design and manufacturing of LED light engines will soon lead to various profitable or even lucrative businesses in the lighting industry. But such success may be plausible only from breakthrough innovations and strategic intellectual property or IP and partnership developments. In particular, disruptive technologies relating to glare reduction, uniform light distribution providing viewing comfort, safety and illumination quality and well as improvements in wafer quality and manufacturing platforms are crucial for LED success in the general lighting markets. Although a great deal of capital from companies, public and private investors have been and are still being poured into such activities, recognizing what company has the right solutions and how the solutions will be protected or distributed through partnerships and licensing will determine the winners in the LED lighting space in the foreseeable future. Samsung, GE, Philips, Osram and Avago are some hopeful candidates for this race, primarily because of their organic optoelectronic technology and product development experiences over many years.

It is hard to say whether Apple or Samsung will continue to be hugely profitable companies for shareholders or in general for many years to come. Certainly both have very large sums of cash and unique product platform capabilities and both are focusing on various future strategies that could ensure success over the long term. Some say it would be smarter for Samsung to invest much of its money in semiconductors, which is a highly capital-intensive business, and in other potential growth areas that could disrupt their competition, as Jeffries' analyst Sundeep Bajikar pointed out (here). But what does investing in semiconductors mean? It could very well include LED lighting in a major way.

For Apple and Samsung, effective cash utilization will boil down to doing their homework, understanding diversified technologies, selecting winning methods and managing IP strategies, having the right vision, successfully executing M&A deals and effective management after M&A. It may be more natural for Samsung to become a leader in the LED lighting business because of their semiconductor design and manufacturing standings. But that could be trumped if for example Apple partners with Taiwan Semiconductors (NYSE:TSM) which has already invested over a billion dollars into LED lighting development in the past few years. Like TSM, Intel (NASDAQ:INTC) may be another partner candidate. With technologies and products becoming ever so sophisticated and the fact that the number of patents and companies involved as well as the amount of capital outstanding are all so massive that it is hard to predict whether Samsung or Apple will be the winner beyond the five year horizon, or even what company will be the next Samsung or Apple. But, in the meantime, Samsung's P/E of 7 makes it an attractive buy because of its dominant electronics and appliance businesses alone. I think Samsung's ADR trading in the US stock exchange will soon be in the cards.

Disclosure: I am long NOK. 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.