Will Samsung's Q2 Results Prove To Foreshadow Apple's Q3 Results?

| About: Apple Inc. (AAPL)

Summary

Samsung moved forward its Galaxy S7 series and found it to be of great benefit to sales.

Apple may have lost modest market share in light of Samsung's handset sales results and strategic marketing efforts.

Channel sales data and inventory levels support a forecast for iPhone 7 sales to be down low double-digits from the iPhone 6 series.

In early June I had offered a potential action that Apple Inc. (NASDAQ:AAPL) might pursue should it desire to stave off the competitive landscape in the handset business. In the publication "iPhone 7 Launch Date: Move It Forward To Address Competition" I suggested that Apple should move its next iteration of the iPhone forward as other handset makers were doing so. The direct and well-intentioned reasons for Apple to take such action were offered to address the threat of Samsung's Galaxy S7 series of handsets to address the back-to-school shopping season and to address the threat of international market competition.

In my assessment, there are limited presented risks to Apple moving forward their launch of the iPhone 7 and an abundance of risks to maintaining its typical product cycle timelines. What we may be learning presently is that the original suggestion to move the product cycle forward for iPhone 7 may be optimal in light of Samsung's recent reporting.

The Wall Street Journal published the following with regard to Samsung's recent Q2 2016 disclosure:

The Galaxy S7 launch, which Samsung moved forward to early March this year from its customary late April event, allowed the company to capture consumer enthusiasm for the handset in its first quarter earnings report.

And the Galaxy S7 appears to have continued to sell briskly into the following months, helping the company recover after a bruising two years that saw its mobile profit margins dip as low as 7% after Chinese brands flooded the market with competitive models at much cheaper prices.

Through the reporting by the Wall Street Journal, the results speak to the strategy of moving forward the launch date of the Galaxy S7 series by Samsung and by greater than a month. During that 30-45 day period, Samsung was likely able to grab market share and siphon users from the Apple user base and/or draw new upgrades from the existing Samsung user base. This was one of the very reasons I believed Apple should have moved their iPhone 7 launch date forward as market share in an otherwise saturated marketplace is of great value to the company. Moreover, if indeed Apple did lose modest market share to Samsung in the most recently ended period, the company has also lost customers for the next 25-29 months.

In warning Apple and its investors about the Samsung Galaxy S7 in an earlier publication, I denoted the strength of the marketing behind the handset series and how it may affect Apple's Q3 and future handset sales. The deals for the latest Samsung Galaxy S7 series have been widely positioned and promoted for greater than two months now.

Not to be caught out by the very tempting buy-one-get-one-free offers currently being run over at AT&T (NYSE: T) and T-Mobile (NASDAQ: TMUS), Sprint (NYSE: S) and Verizon (NYSE: VZ) have also started offering similar promotions on new Samsung Galaxy S7 and S7 Edge purchases.

Through retail channel checks and POS data Capital Ladder Advisory Group discovered that sales of the Galaxy S7 were moving more rapidly than had been anticipated and the Galaxy S7 Edge was performing better than its predecessor at the high end. It has been the case more often than not that Korea hypes the results of new Samsung phone sales and proves the hype to be just that. But this time around we were seeing a very different picture painted in the intra-quarter sales picture. With both strong promotional activity and the decision to move the Galaxy S7 series launch forward, the gap bridged in the upgrade cycle proved to be a positive sales strategies for Samsung in the latest quarter. Additionally, due to the lack of promotions surrounding the iPhone it can be offered that this reduced some of the marketing costs related to Samsung's Galaxy S7 launch. Consequentially, I'm of the opinion that such strength in Samsung handset sales will prove to be to the detriment of Apple iPhone sales during the latest quarter and for the Q4 2016 period.

Capital Ladder Advisory Group channel checks, from several key iPhone retailers, showed steeper than expected YOY declines for iPhone sales during the month of May. However, as the quarter dragged on sell-through improved month-to-month. Inventory remains stable among retail distributors, but shipments (sell-in) will likely prove to be less in Q4 2016 than the same period a year ago based on demand that coincides with the extended upgrade cycle.

The situation for Apple and its upcoming iPhone 7 launch doesn't appear favorable for Apple. As noted earlier, Samsung is pressing forward with outsized marketing campaigns. One might call it the Samsung Galaxy S7 "marketingpalooza" and Apple's iPhone 7 will have to not only carry with it the typical marketing campaign, but also contend with a special edition Samsung Galaxy S7 smartphone. Samsung will launch an Olympic version of the Galaxy S7 Edge during the Summer Olympic games and give one to each Olympic participant for free. Aside from Olympians, the special edition smartphone will be available to consumers in the United States through Best Buy (NYSE:BBY) and while supplies last. In addition to Best Buy, the phone will be available in Germany, China and of course South Korea. Based on the continued marketing push to support product launches through the remainder of the Summer and Fall months by Samsung, Apple's iPhone 7 will find itself up against an even greater wall with regard to improving sales from a dismal Q2 2016 performance.

Based on the data at hand and proven results for moving product cycles forward by Samsung, I believe Apple needs to rethink its strategy regarding timely product launches and the marketing of its products. It's quite possible that Apple's dedicated launch strategies will prove to shed market share for the tech giant. Alongside shedding market share, I also would be of the opinion that iPhone shipments will take longer to rebound from their recent decline. As such, my opinion may be perceived as contrasting with Piper Jaffray's Gene Munster.

Munster recently reported that the low expectations surrounding the iPhone 7 launch are taking risk out of the product cycle. He supports his Overweight rating and $153 price target for shares of AAPL by stating the current resale value for iPhone products remain strong and stronger than that of Samsung handsets. While these notes and research points are definitively leaning toward a more positive perspective of things to come for the stock, I don't believe shares of AAPL will fall inline with the analyst's sentiment over the next 6-12 months. And please keep in mind that Munster is mainly referring to the stock and not the company performance as a whole.

Apple is actually trading relatively well when compared to its Q2 2016 performance results and FY16 lowered guidance. Having said that and pushing aside the stock for the moment, I believe the current FY16 guidance offered by Apple when revised lower during the Q2 2016 reporting will be found revised yet again. This will find analysts, like Munster, revising their outlook on the stock more than likely. Having said that, if Apple does not revise its FY16 outlook, I believe the Q4 2016 period will not find the demand needed to meet current guidance for FY16. A few of the reasons I believe this to be the case are as follows:

  • European markets will prove to weaken for Apple product sales in subsequent quarters due in part to Brexit and currency fluctuations.
  • iPhone 7 shipments will be subdued given the further extension of the product upgrade cycle from 25 weeks to 29 weeks. I'm estimating iPhone shipments for the upcoming product cycle to be down 12-15% from the iPhone 6 product cycle. Sales more so than earnings will be impacted as Apple can more proficiently manage its supply line costs.
  • Continued downturn in tablet and Mac sales, especially in Europe and Asia-Pacific.
  • Apple Watch sales less robust than initial launch occurring in same period a year ago. Tough comparison for "Others" sales category in the year ago period.
  • Expectations for back-to-dchool sales dampened due to consumer spending trends.
  • Apple has gone dark with regard to marketing the existing iPhone 6 series and it is difficult to flip the switch and reengage customers. This may help with bottom line cost efficiencies but prove to impact sales more egregiously.

In summation and as we head into earnings season, AAPL shareholders are offered some early results from Apple's chief competitor in the handset marketplace. While I would agree that sentiment has become weakened over the last 90 days for AAPL shares and the iPhone 7, it remains to be seen if the sentiment has weakened in line with the potential for FY16 results. Moreover, the weakened sentiment could prove to be overdone should Apple show even modestly incremental improvements in sales. The one thing investors can find solace in with regard to shares of AAPL is that they still reflect a deep value when juxtaposed to the company's earnings profile and balance sheet. As such, this may prove to the benefit of the share price even if sales continue to disappoint. Additionally, with Apple's mighty cash pile, the company is offered the ability to adjust more aptly and proficiently to meet the demands on the business. While the company is experiencing hard times with sales, the stock is another story and Gene Munster has offered his analysis along those very lines.

Disclosure: I/we 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.