Samsung's Mini S4 Is Unjustly Lambasted

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

Samsung (NASDAQOTH: SSNLF) is trying to recover from a June 7 thrashing when the company lost $12 billion in market value due to brokerage downgrades.

The slowing sales of the firm's Galaxy S4 smartphone fueled pessimism and a 6% one-day slide. Ironically, just two days earlier, Samsung won a patent battle over Apple's (NASDAQ: AAPL) use of the South Korean firm's 3G technology. That led to a ban of the import of Apple products that use 3G wireless technology, including several Apple gadgets capable of concurrently transmitting multiple services.

Samsung's fuzzy critical reception

Logically, that would indicate a surge in sales of Samsung products in the United States, but it didn't stop the downgrades and stock plunge on June 7. The thumbs down came after the release of two stripped versions of the Galaxy S4 smartphone. The mini phone targets a mid-tier market, which would help cater to those who can't afford the full versions, including many consumers in developing countries -- a market the smartphone giants are exploring. 

That's why it's better to take a look at a company's financial stability, market trends and company news. Samsung has the highest return on equity in the audio and video equipment industry, but it isn't receiving a lot of high fives. Investors don't expect the company to grow by much, as its PE ratio is 8.2 compared to the industry average of 28. But, that represents a major buying opportunity. If you don't want to take my word for it, let's read what those analysts are saying.

What the analysts are saying

Many analysts have said the increased production means Samsung is trading profits for a higher volume of sales. Also, sales of the company's higher-end S4 have slowed since it's release in April.

Kim Young-chan, analyst at Shinhan Investment Corp., told the Globe and Mail that sales of the higher-end S4 are not meeting expectations. But, the "low- to mid-end handsets" are selling around the world -- apparently not fast enough to discount downgrading. Worldwide distribution would be an indication that Samsung may have found a way to produce a cheaper smartphone that could spread like wildfire through developing nations. If that is the case, then I wouldn't take the downgrades too much to heart, and I would look for a swift rebound in the stock's price. And, if the Mini S4 does catch on internationally, huge profits could be made. 

Global demand for an affordable smartphone

Globalization has played a major role in creating more disposable income in various nations as the middle class continues to grow. The smartphone company able to dominate this new market could be the first to reach the trillion-dollar-value mark, which might not be as far off as we may think. Apple is also making an attempt at profiting from the developing world by crafting an iPhone that is cheaper to manufacture and can be sold at a reduced price. In fact, Samsung's Mini S4 release put the pressure on Apple to come out with an affordable smartphone. But, all the parts have to be in place for the bargain iPhone to generate a profit. 

Apple announced on June 13 its planned entry into the affordable smartphone market. The announcement came not long after Sprint reported it would sell a phone for $99, which is around the price-point that the developing world could afford. Apple didn't announce the price it would charge for the cheaper version of the iPhone, but with the marketing finesse that the company has shown over the years, it may be the best company to position itself to profit in the emerging market. 

It's hard to deny that Apple will likely lead the way into the developing world if the company can hurry up and manufacture the affordable iPhone before Sprint or Samsung make dents in the market -- and Apple may need to expand fast. While investors have average growth expectations for Apple, I think the company has hit its peak. Market share is dwindling, and Apple hasn't released anything groundbreaking since Steve Jobs was at the helm. The PE ratio is 10.3, which is under the computer hardware industry average of 16.8. Furthermore, the firm looks overvalued with an above-average price to book ratio of 3.0 in the computer hardware sector. I'd stay away form buying Apple, but keep an eye on its emerging world development. The release of an affordable iPhone could allow the company to access that trillion-dollar market.

Tech titan fast approaching the market

Samsung and Apple are looking in their rear view mirrors at fast-approaching Google (NASDAQ: GOOG), which is an object that might be "closer than it appears." If Google's Moto X, which the CEO of Motorola said will be released by October, is more affordable than the Mini S4, then Google could be the go-to smartphone provider around the world. I suspect that, now that Motorola is owned by Google, it will have the financial backing to gain a smaller profit margin but a higher volume of sales. The device could be a breakthrough, not only in the developing world, but in developed nations where many people will choose a more affordable device if it has the functionality to which they've become accustomed with the Galaxy or iPhone.

I'm gaga over Google. The company seems to be the only firm on the verge of making major hardware advancements. Through its Google X division, the firm is working to develop Google Glass, a self-driving car, and hundreds of thousands of balloons that float in the stratosphere and provide a worldwide Internet connection, even to mountaintops. If any of these projects catches on, it could be even more groundbreaking than the iPhone, and we know what that release did for Apple's shares.

The company's fundamentals are going to be very optimistic and cause many investors to be misled. This is because many people, like me, think Google is the coolest thing going. The price to book ratio of 3.8 makes the company look overvalued due to the fact it is above the industry average. It's also around 13% higher than last year. However, the company's return on equity is attractive and it is the highest in the entire computer services industry. Furthermore, the profit margin is a tidy 21%, which is stellar.

Getting back to the Galaxy S4

So, will decreased sales of the Galaxy S4, and the "volume-over-profits" scheme that Samsung is accused of playing, hurt the company's bottom line? I highly doubt it. In fact, the Mini S4 will likely catch some steam in the developing world, and could put Samsung ahead of the competition in this growing market. But, Apple's announcement of entering the market -- and Sprints recent affordable release -- means Samsung needs to hurry up and get sales flowing in the emerging market. It's one thing to be able to make an affordable smartphone, and it's another to get that into the hands of the growing global middle class.

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Phillip Woolgar has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google. 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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