Flexibility the Key to Samsung’s Stunning Growth

Peter is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Samsung recently revealed some of the financial results for its most recent quarter; it seems like a replay of the Apple (NASDAQ: AAPL) bull years, the numbers are just staggering, especially in the mobile division. Operating profits for the fourth quarter increased by 89% to $8.3 billion (8.8 trillion KRW), which is more than the analysts’ estimates compiled by Bloomberg of 8.5 trillion KRW. Quarterly sales have risen by 18% to $52.89 billion (56 trillion KRW). A large percentage of these sales are estimated to be due to increased demand for high-end TVs with OLED display and Galaxy series smartphones. The sudden boom came as a result of the customers moving away from Apple, especially in emerging markets and ChinaAnnual sales have increased by 21.8% to $189.7 billion (201.05 trillion KRW) which has made Samsung the first and only South Korean company to have ever posted more than 200 trillion won in sales.   This is a company that is relentless in developing new technology, and it’s one of the reasons why it has been able to be so opportunistic.

Last year, Samsung took the market leader crown from Nokia (NYSE: NOK) and likely won’t relinquish it any time soon. It pounced on the vacuum left by Nokia and Research In Motion and HTC -- the latter finally trying consumers’ patience with substandard value.  Samsung and Nokia dominate the market of all mobile phones with 22.9% and 19.2% share of the global market, while Apple is in the third position with a market share of just 5.5%. While Nokia’s market share has dropped, Samsung and Apple saw increases. Samsung shipped 105.4 million mobile phones in the quarter that ended September 2012 compared to 82.9 million by Nokia.

In the smartphone arena Samsung is also the market leader with 31% of the market versus Apple’s 15%. 

Galaxy S III sales reached the 20 million mark in just 100 days, as compared to its predecessor the SII which sold 10 million units in five months. The SIII’s success was because of the dramatic overhaul of design as well as software and timing.  The summer was a dead space while its competition readied new devices for the fall, and Samsung pounced to fill the void and used the London Olympics as its stage.

Shifting around to the company’s other units, operating profit at the Chips division for the fourth quarter was estimated to drop by 34% to $1.44 billion. This decline in sales is coming due to Apple’s reducing its orders to Samsung and moving to other suppliers.  Long term, Apple is looking to move to a similar structure to Samsung, outsourcing nothing.  Samsung was a core supplier for Apple’s micro processors, flat screens and memory chips - both dynamic random access memory (DRAM) chips and NAND memory chips - for the iPhone, iPad and iPod.  But, since there is a real tightness in the market for chip production, especially 28nm and below, Samsung will have no shortage of partners to fill in the lost revenue from Apple.

For Samsung the real growth area is the tablets and smartphones market, which require far less memory storage. Meanwhile, Apple is rumored to launch a low-end iPhone in the future to cater to a wider market; this is really a watershed moment and I won’t belabor the point, but for Apple to come off its high-margin horse will damage its brand with its core customer base in the U.S. and Europe.  The brand mystique is already failing in Asia. To cut cost on the new design, Apple may use a plastic body. Unless Apple decides to make a real entrance into cost-conscious markets like India I do not see how this benefits them.

Where only few can match Samsung at this point is in R&D. A company this diverse is capable of riding and perfecting whatever innovations its competition comes up with.  It had an R&D budget of $41.4 billion in 2012 to spend on R&D, M&A and new staff, which is more than twice the market cap of Nokia ($17.38 billion). Also, the loss in the chip business, will keep Samsung for investment in the DRAM business.  Taiwan’s Asustek has shown the world what a phablet is: a phone that docks onto a tablet screen.  This is something that points towards the future of the mobile computing market as much as the larger display phones, 5+”  screen size.  The 7” tablet success has given us the first real new iteration since the iPad and Apple’s success with the iPad mini, which it didn’t want to make, is proof that a more portable and more powerful all-in-one device is something many people want.  Mix in Samsung’s incredibly impressive flexible screen it showed off at CES recently and we can see where this technology might be headed.

Samsung is expected to post an even better result in the fourth quarter. The booming sales of smartphones will ensure that company remains the dominant player in the smartphone market. According to DigiTimes, Samsung is aiming to sell half a billion mobile devices around the world in 2013. Of this, 350 million, or 70%, are going to be mobile phones. This could translate into Samsung increasing its foothold in the global smartphone market share to 40% while it pushes the envelope in terms of product offerings.  When your product line is as extensive as Samsung’s, you get a lot of market feedback quickly, which allows for a bit of experimentation with niche products.  When you have one product to sell and the market does not like it, you become RiM very quickly.

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p>Samsung*</p> </td> <td> <p>Apple</p> </td> <td> <p>Nokia</p> </td> </tr> <tr> <td> <p>Stock 6M</p> </td> <td> <p><strong>+31.25%</strong></p> </td> <td> <p><strong>-19.67%</strong></p> </td> <td> <p><strong>+152.17%</strong></p> </td> </tr> <tr> <td> <p>P/E</p> </td> <td> <p>11.1</p> </td> <td> <p>11.01</p> </td> <td> <p>N/A</p> </td> </tr> <tr> <td> <p>EPS</p> </td> <td> <p><strong> +$126.88 </strong></p> </td> <td> <p><strong> +$44.15 </strong></p> </td> <td> <p><strong> -$1.53</strong></p> </td> </tr> <tr> <td> <p>Yield</p> </td> <td> <p>N/A</p> </td> <td> <p>2.10%</p> </td> <td> <p>3.80%</p> </td> </tr> <tr> <td> <p>ROA</p> </td> <td> <p>9.62%</p> </td> <td> <p>23.61%</p> </td> <td> <p>-3.88%</p> </td> </tr> <tr> <td> <p>ROE</p> </td> <td> <p>19.34%</p> </td> <td> <p>42.84%</p> </td> <td> <p>-42.89%</p> </td> </tr> </tbody> </table>

* Samsung Electronics (005930.KS)

Samsung has significant representation in the iShares MSCI South Korea ETF (NYSEMKT: EWY). In the last six months, Samsung’s shares at the Korea Stock Exchange (KSE) have been up 31.25%. During the same period, EWY went up by 18.26%, since Samsung literally is so big it comprises 20% of South Korea’s GDP.  Samsung’s ability to shift with the industry, not necessarily lead in terms of innovation but maintain its flexibility, is the secret to its success.  


PeterPham8 has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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