Apple set to take advantage as Samsung falters

Samsung shares have been on a tear in 2016 as its latest smartphones have proven popular. Its valuation was starting to close in on rival Apple, the world’s most valuable company. But then it reported battery problems for its new Note 7 smartphone, and the share rally petered out.

Samsung promotion
Source: Bloomberg

Things can change quickly in the technology sector. Samsung, the world’s biggest producer of smartphones by market share, was surging as the Galaxy S7 flew off the shelves. In July it reported its most profitable quarter for two years, and in August its shares hit an all-time high. Its stock was closing the valuation gap with Apple, its closest rival and the world’s most valuable company, as concerns grew that the US technology giant was losing its cutting-edge in terms of mobile phone design and technology developments. Samsung’s latest phones are seen as having two big advantages over Apple’s: a much better battery performance and its innovative curved screens.

Then Samsung suffered a massive blow. In what is likely to prove one of the most costly recalls the technology industry has ever seen, the South Korean firm will replace all 2.5 million of its Galaxy Note 7 phones already shipped due to the risk of the batteries bursting into flames. It comes just weeks after the phone was launched to some of the best reviews for any Samsung phone.

Samsung’s strong share price rally has run out of steam


The launch of the Note 7 was also seen as an attempt by Samsung to steal a march on Apple. Apple is expected this week to unveil its latest smartphone, possibly named the iPhone 7. However, the phone is expected to be evolutionary rather than revolutionary, and the usual fanfare that greets Apple's new product launches has been muted. Speculation is that it will have an upgraded camera, wireless headphones, more battery power, and a pressure-sensitive home button.  

However, Samsung’s problems mean Apple could actually now steal a march on the South Korean company instead. Samsung has predicted it will take just two weeks to manufacture new phones for existing customers, but it will also mean a dearth of phones on the market for potential new customers to buy just as Apple’s new device arrives. That’s very bad news for Samsung as it tries to convert Apple customers, especially as the stunning growth of the global smartphone market in recent years is slowing fast and there are strong indications that smartphone users are buying fewer upgrades and hanging onto devices for longer.

As long as Samsung can solve the problem as quickly as it says it can, the issue may not be devastating or long-lasting, but it’s definitely an unexpected gift for Apple.  

While Samsung’s shares have risen 27% so far in 2016, Apple’s shares are up just 2.35%. The US company remains heavily reliant on the iPhone for its revenues and profits, and the new releases just aren’t generating the same level of excitement that they used to. But perhaps that is unsurprising. Apple is now a mature company operating in mature markets. How can it be expected to continually revolutionise the device market? On the plus side, Apple’s customers are sticky – they tend to stick with the company’s devices because services like music are so entwined with the devices.

Could Apple’s product launch give its shares a new boost?


And that’s why Apple is still valued at more than Samsung. Apple’s market capitalisation is $580.5 billion to Samsung’s $205.8 billion, its shares trade on a blended price-to-earnings ratio of 12.1 times compared with 9.8 times for Samsung, while its enterprise value-to-earnings before interest, tax, depreciation and amortisation is 6.0 times compared with 2.9 times for Samsung.

For investors, this made Samsung the more attractive proposition before its battery recall. Now, Samsung shares are looking decidedly more risky. Samsung has moved very quickly and decisively to resolve the issues with its Galaxy Note 7, and that should go down well with its customers. As well as potentially losing custom to Apple, Samsung faces tough competition from other manufacturers making phones with the Android operating system. A quick resolution will also be necessary to assuage investors. It's facing a hit in the current quarter, but must make sure it's a one-off that doesn’t drag on. 

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