There has been quite a bit of talk about how well Samsung's (OTC:SSNLF) new phone, the Galaxy S5 is performing. Even though it has been less than two months since the S5 hit the market, industry observers are salivating at the sheer volume that Samsung has already shipped.
According to data released by research firm IDC, Samsung has already shipped 85 million smartphone units in the first quarter. And when you consider that this is more than the combined total of Samsung's next four competitors, including Apple (NASDAQ:AAPL), it raises questions as to how much demand will there be for Apple's iPhone 6, which is rumored for release sometime in September.
While Apple did ship close to 44 million iPhones in the first quarter, Apple has already been rewarded to the tune of 14% jump in its stock price since it reported earnings fiscal second-quarter earnings. The question is about the iPhone 6 and the impact that Samsung's S5, which, according to some is selling like "hot cakes," will have on Apple's future demand. Recall, this has been Samsung's strategy for the past two years.
The Korean tech giant has tactically beaten Apple to the punch with several launches. But it isn't just about the product. For Samsung, the strategy has been to give customers two, and at times, three products from which to choose before Apple releases its new iteration. To achieve this, Samsung management has put in place a 6 to 8 month product refresh cycle. They know that Apple couldn't or would choose not to follow suit. Apple, meanwhile, refreshes/updates its iPhone and other devices every 12 to 18 months.
This is why Samsung has already released the Galaxy S5, less than a year after releasing the popular S4. This means that Samsung will have two strong-selling phones to compete with Apple's iPhone 6, whenever it launches. And when you combine this strategy with Samsung's strong marketing (I won't say in your face marketing), this scheme has indeed proven effective.
The question now is, to what extent should Apple investors fear a downbeat reception to the iPhone 6. After all, Samsung believes it has already found "the next big thing."
The good news is, Apple investors have a very important reason to remain excited. Aside from the fact that Apple management has finally embraced the idea of a bigger phone, statistics show that several iPhone users have not upgraded their phones in quite some time.
Morgan Stanley (NYSE:MS) conducted a recent study, which revealed that many older generation iPhones remain in circulation, including the three-year old iPhone 4. Interestingly, the study highlighted that among the devices on the Verizon (NYSE:VZ) network, more than half of those devices were either iPhone 4 or the iPhone 4S. And that's the same situation with AT&T (NYSE:T).
In any case, this study, which suggests significant pent-up demand for customers who are in a position to upgrade to the iPhone 6, is why analysts didn't care about Apple's weak iPad results in its recent earnings report. From that standpoint, it's only a matter of time before analysts figure out what this sort of pent-up demand may mean.
But analysts will have no choice but to raise their estimates, particularly since Apple showed incredible margin leverage in the quarter just completed. Plus, when you combine this potential demand with the effect of China Mobile (NYSE:CHL) and its 770 million subscribers, Apple can possibly sell 60 million iPhones in one quarter. And you thought this quarter was impressive. You haven't seen anything yet.
It's a good thing Samsung is selling its phones now. It will be hard to convince Android users not to switch to Apple. Google (NASDAQ:GOOG) (NASDAQ:GOOGL) has steadily grown as the dominant mobile operating system at the same rate that Samsung has expanded its lead as the top device seller. But that, too, is being threatened.
In Samsung's most recent quarter, during which the company posted an impressive profit of $8.24 billion, the company also posted 2.5% decline in mobile revenue. So the effect of Apple and possibly saturation is beginning to hurt. This would also prove threatening to Google. And although Apple has never cared about "selling the most," Apple would gladly accept being the best, assuming it can use the iPhone 6 to surpass the fragmented Android as the dominant mobile OS.
Disclosure: I am long AAPL.
Business relationship disclosure: The article has been written by Wall Street Playbook's tech sector analyst. Wall Street Playbook is not receiving compensation for it (other than from Seeking Alpha). Wall Street Playbook has no business relationship with any company whose stock is mentioned in this article.