Another Reason Apple May Worry About Earnings: Samsung
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Consumers not desiring to wait around for Apple’s iPhone 5, quickly snapped up other devices during the last reporting quarter, thus boosting the sales of Apple competitors, especially Samsung, which last week announced record profits for the period.
Indeed, many are waiting for the iPhone 5 to debut in October (at least that is the rumored release date), and that should help Apple’s (NASDAQ: AAPL) earnings for quarters moving forward. That’s the premise guiding many after the company missed earnings estimates for the second quarter, which was highly unusual for the market mover.
The thought is that earnings were down because iPhone lovers didn’t want to buy the old iPhone 4 during the second quarter, speculating that the new version’s release date was right around the corner. I’ve heard, “Oh this happens all the time; right before a new product launch from Apple…”
While I clearly see this as a reason for the company’s fall off in earnings in the past, I don’t think that can be the main excuse moving forward. The monkey wrench that has been thrown into this scenario involves Samsung, and the huge and growing popularity of its flagship smartphone, the Galaxy S III. This phone, launched in the spring, is Samsung’s direct response to the iPhone.
I can feel the heat already for having the gall to bring up Samsung’s phone as any kind of threat to Apple’s iPhone. Well, I’ll point out Samsung’s most recent earnings report that came out on Thursday as one of the reasons I’m more bearish on Apple than the masses.
Last week, Samsung announced that earnings from its handset unit jumped 75% during the second quarter of this year compared to the same period in 2011. The 20.52 trillion won in revenue it reported for the three months that ended June 30 translates into roughly 42 billion U.S. dollars. It made a $5.9 billion profit, which was a record for the Korean-based electronics giant. Robust sales of the Galaxy Note tablet and the launch of the Galaxy S III smartphone were the reasons behind the impressive numbers. In fact, Samsung set a target of selling 10 million of the Galaxy smartphones during the month of June, and it hit it.
Samsung’s earnings compare to roughly $32 billion reported by Apple for its third quarter ending on June 30. Its net profit was $8.8 billion.
Samsung’s success is impressive to say the least. However, it faces the same pressures as other companies, especially those with exposure to Europe. Like Apple, Samsung, which is the largest producer of handsets, says that its earnings are being affected by the economic slowdown in Europe.
In its earnings report, the company stated, “As we move into the second half, continued fiscal instability in Europe and its effect on the global economy will result in the possibility of a slower-than-expected recovery and intensified market competition."
Both companies have to contend with moving their products in a market that is growing more and more crowded. Google (NASDAQ: GOOG) just rolled out its Nexus 7 tablet, which is doing well among those who prefer the 7-inch screen to the 10-inch screen sported by the Galaxy and iPad. Google is somewhat of a double whammy for Apple considering its Android operating system powers other devices, like Samsung's Galaxy tablets and Amazon’s (NASDAQ: AMZN) Kindle. Microsoft (NASDAQ: MSFT) is expected to debut its first tablet, Surface, by next year. It’s noteworthy to point out that Google, Microsoft and Amazon also missed Q2 estimates and largely blamed their exposure on Europe, too.
As the tablet field grows more crowded, the introduction of a minipad that will be in the 7-inch size range should bode well for Apple. As people become more familiar with tablets, more are choosing the smaller 7-inch devices because of their ease of use. Recognizing this and catering to this market is a good move for Apple.
Samsung’s dominance of the mobile market is impressive, but so are the fundamentals of Apple, which still enjoys significant upside and market share gain potential. At the time of writing, it was trading around14 times earnings. The company’s annual profit growth rate over the past four years is 66%.
For now, Apple’s and Samsung’s tablets and smartphones are the most popular. Just look at the fact that Apple sold 17 million iPads during its last quarter – but it still missed estimates. Will the company be able to maintain its position even in the face of increased competition, especially from Samsung? Will the new iPhone be the saving grace? Doubt it. No matter, Apple is a force to be reckoned with, but the competition from Samsung will continue to give it a run for its money – literally.
TwillyD has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.If you have questions about this post or the Fool’s blog network, click here for information.