Recently, I have seen a flurry of articles from some of the smartest contributors on Seeking Alpha with regard to Samsung (OTC:SSNLF) overtaking Apple's (NASDAQ:AAPL) innovational lead. Ashraf Eassa's Samsung Is Apple's Worst Nightmare is my favorite article on the topic and Michael Blair's Emerging Competition Threatens Apple In 2014 is another one of my favorites on the concept. In complete honesty, there is an item with regard to these two companies that I feel should be discussed in more detail. One main idea is that Apple can relax and out innovate Samsung (Ex. fingerprint scanner and 64-bit processor in iPhone 5S with no comparison in the Galaxy S4), in the face of Samsung's massive sales numbers, and regain lost marketshare in the future when Samsung is unable to keep up with Apple's innovation. Although this idea is very far from reality - Samsung's massive sales will feed not only massive profits for the proliferation of its brand, it will lead the company to out innovate Apple in the future.
1. Apple's Q3 Sales Are Normally Weaker
Recently, Samsung blew the top off of Q3 smartphone sales. Although, Apple generally has a decrease in iPhone sales for Q3 and Q4 following the first two quarters of the year. This is due to the company's release of the new iPhone model and seasonal selling patterns. On the other hand, even if you doubled Apple's recent Q3 release, it doesn't even come close to Samsung. Samsung has almost 4x the device sales in the third quarter over Apple, meaning that seasonal quarterly changes in device sales does not change the fact the Samsung is king in device sales.
Quality Vs. Quantity: Endgame
I wrote an article a few weeks ago detailing the insane graphics that can be achieved on the new iPhone 5S - I love the device. Although one area that struck me as interesting is the endgame. Three questions come to mind when I explore this situation that will be covered in the latter sections of this article.
- Is there a point when Samsung is producing so many devices and have saturated the market so much, that they simply start to fall off a cliff?
- Will Samsung be able to produce mass quantities devices to serve the high and low end market - thus degrading the need for Apple's premium products?
- Is Apple playing slow and steady, to maintain its premium product line through major advancements while they wait for Samsung to wither out in face of its future ultra premium product line?
All of these questions seem to come back to some obvious realizations and one main idea. Clearly Samsung can continue producing mass products that compete with Apple's devices, and continue to grow its marketshare. Samsung's huge device sales and enormous success will continue to grow its company's bank account - already at $47 billion today.
Answering These Questions
The market has seen mobile device sellers go from fame to famine - BlackBerry (NASDAQ:BBRY) is a prime example. The quote "this time is different" seems harsh, although it is allowable here. This is because BlackBerry was unable to keep up with the extremely innovative technology that was being offered by the marketplace - primarily with the launch of the first iPhone in 2007. Although Samsung and Apple may be differentiated in terms of each's respective product line, Samsung will not be in the position BlackBerry was suffering in, in the past.
This is due to the fact that Apple and Samsung's products are differentiated, although both innovative. Thus Apple offering a fingerprint scanner and a 64-Bit processor with an extreme amount of power in its iPhone 5S as Samsung offers a better battery, camera and other aspects in its Galaxy S4 is not a make or break situation.
The product differentiation by Apple and Samsung is a key discussion element. Let's go back to one of our original questions, will Samsung erode Apple's premium product line-up. The fact of the matter is that Apple does offer game changing technologies now, and they will be at the forefront of technology for the near future. Offering curved screens for the iPhone 6 will make some waves, although it may be a little too late. As shown by Apple's less than spectacular iPhone 5C sales.
For those following the Galaxy S4 more closely, there is a version that rocks the Qualcomm (NASDAQ:QCOM) snapdragon 800 chip - with the ability to achieve 4G LTE-Advanced for speeds way beyond that of Apple's LTE equipped devices.
One of my main fears for Apple is proving to be true, and having it unfold will be devastating to Apple if they do not pick up its innovational and marketshare reach soon. It is my opinion that Samsung will continue to increase its marketshare through its spectacular device sales well into the future. With this success, Samsung will have the ability to out innovate Apple - primarily with its growing company size and resources that it can use to out-research, out-hire and outdo Apple.
Going back to the last question I have proposed, I believe that Apple staying slow and steady may be a terrible idea. This idea brings me to Microsoft (NASDAQ:MSFT) who faced some competition in the PC market with the intense growth of Mac. Although as Microsoft maintained steadfast, it has kept its enormous grasp on the PC market. Apple had its highest PC sales in Q3 of 2012 at 2.15 million units, this number has not been surpassed yet.
This comparison may be less than competitive as Microsoft has a hold over the PC market via a large number of brands that use its operating system, although the idea is constant. This question is whether or not if Apple remains constant and innovative, if they will be able to out-innovate Samsung and thus regain its lost marketshare in the future - the way Microsoft thwarted MacOS.
This is a loaded question that goes back to two main areas of discussion.
- Apple's OS marketshare seems to be small and constant - thus they can coexist with Windows.
This idea of coexistence has a clock though. Apple is obviously not making as much money as the Windows group on its smaller premium portion of the marketshare thus it will provide Microsoft with more sales, more profit and more money in the future to out innovate MacOS. Mac is more in competition with the various devices that utilize Microsoft's operating system although the comparison can be successfully applied to Apple and Samsung, discussed below. This idea actually helps Samsung, as Microsoft held the marketshare prior to Apple - much the same in the future as Samsung has the marketshare and Apple would attempt to regain it through innovation - albeit unsuccessfully as Microsoft held the PC market.
Conclusion: The Clock Is Ticking
The idea that Apple can remain on the sidelines and continue to innovate in hope that Samsung will be not able to catch up enough in the future and will thus fail in the face of Apple's innovations is grasping at straws. Going back to Microsoft with regard to Mac's operating system, the former had a lead prior to the proliferation of Mac's operating system - the same as Apple having a lead in the premium smartphone space over Samsung. Although the difference is that Samsung has overtaken Apple on a basis of quantity - a powerful tool. This quantity is feeding profit that can be used to in turn out innovate Apple.
There is no doubt that Apple's future innovations will be extraordinary and they are a large and powerful company. Although having a large bank account to do share buybacks to increase share price is pointless when the company itself is losing marketshare to its competitors. For Example, Cisco (NASDAQ:CSCO) boosted its buyback program by $15 billion, although though that is not covering up the disappointing results. The company could have used the money elsewhere, such as a buyout of Juniper Networks (NYSE:JNPR) to feed future growth and innovation instead of a short term boost to the PPS while using precious funds.
I want to be clear about one item in this discussion. I do believe Apple will have enormous sales now and in the future, will have massive innovations and maintain a huge amount of brand power with a sizeable bank account to do whatever the company wishes. On the other hand, the idea that Apple can out innovate as Samsung reaches some hypothetical wall is just that, hypothetical. This point even proves false now, as Samsung has no fingerprint scanner or 64-bit smartphone - yet the company's phones continue to sell wildly.
Over the long term, not anytime soon, Samsung will cement its hold in the smartphone market over Apple with regard to innovation. Samsung's enormous profits and massive device sales is feeding the company's growth and cash levels that will provide it the market saturation and resources to continue to not only out do Apple in terms of quantity, but in quality. I would like nothing more than to see Apple use its current resources and power to expand its operations, product line and become more competitive than Samsung, although the clock is ticking and it seems that it just may be too late.
Sure Samsung will reach the mature developed stage that Apple has transitioned into, someday. Although until then they will continue outdoing and out-innovating Apple while aiming to reach $400 billion in sales by 2020. Samsung even supplies many of the materials needed for Apple's smartphones, such as DRAM, displays, processors, NAND, and cameras. Samsung uses its manufacturing prowess that Apple lacks to unlock more value for the consumer. For example when comparing the Galaxy Note III to the iPhone 5S, the former has many advantages. For the same price of $299 the Note III provides a 1.7 inch larger screen with a 1920x1080 display instead of a 1136x640 display on the 5S. Further the note provides an extra 2 gigs of ram, a Snapdragon 800 chip that is LTE-Advanced capable instead of the A7 chip and an equal 32GB of storage. Oh and the Note III has a slick watch to work with it, lacking a counterpart Apple.
Even though I have written about the iPhone 5S's 64-bit extreme graphical advantages, it seems counter intuitive to the Apple structure. Apple claims to be the simple, user friendly, slick device provider. If so why are they competing to offer a processor that will only really serve the high-performance market segment of the iPhone users - gamers? Seems as though Apple is grasping at straws, I do love the iPhone's gaming ability though. Keep in mind that I am unbiased in my viewpoints, as I use an iPhone 5S and write this article on a MacBook Pro.
Samsung will erode Apple's brand-power through its massive profits from is huge sales that will drive its resources used to out innovate Apple and seriously take the throne. If Apple came out tomorrow with massive plans that were implemented, this may change. Although it seems that Apple may be already staring at Samsung's back in this race and any attempt at buying back shares doesn't buy back marketshare.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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. This article is informational and in my opinion only. Always do your own research and contact a financial professional before executing any trades.