With Q2 performance below expectations, has Samsung finally peaked?

July 5, 2013
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Has Samsung reached its peak? Or is everyone just expecting too much?

Last month, Samsung’s market capitalization was reduced by an alarming $25.3 billion, a figure that is greater than the total value of Sony Corp. This was after the sales of the company’s latest flagship smartphone turned out to be lower than what investors expected. Now, as the company prepares to present its second quarter results on July 26, can the company put an end to its declining market capitalization?

Earnings report

In a preliminary statement released Friday, Samsung said that the company is expecting to have made around 9.3 to 9.7 trillion won ($8.2 billion to $8.5 billion) for the company’s second financial quarter. This is lower than what analysts estimated. Based on polls made by Bloomberg and Thomson Reuters I/B/E/S, the average of analysts’ forecasts is around 10 trillion won ($8.7 billion).

Still, the reported earnings figure is a significant rise from last year’s 6.46 trillion won ($5.7 billion). It represents a 44 to 50 percent increase, although lower than the 54 percent growth achieved during the first quarter.

The company made sales of around 56 to 58 trillion won ($49.1 to 51 billion), an 18 to 22 percent rise from last year’s sales figure for the same quarter. These numbers are close to the 58.6 trillion won ($51.3 billion ) average made by 38 analysts surveyed by Bloomberg.

Samsung did not provide a breakdown of the earnings for the company’s different divisions. Also, net income numbers were not released but are expected to be presented later within the month as audited.

Effect on Samsung shares

As much as Samsung tried to make its earnings expectations look good with high percentage increases in sales and income, the company’s shares still went down by more than 3% on Friday. Apparently, investors are not convinced that the earnings growth Samsung posted is enough.

As of Friday’s announcement from Samsung, the company’s market capitalization has already dropped by 17%, which translates to $34.2 billion. This is now more than the total value of both Sony Corp and LG Electronics Inc.

The S4 factor

Koreans and other East Asians consider the number 4 unlucky, and analysts are saying that the reason for Samsung’s disappointing sales is mainly its latest flagship, the Galaxy S4 or the Galaxy SIV as Samsung would like to have it written.

Despite winning an award for its environmentally-friendly components, having the smallest dimensions among 5-inch flagships, and showing considerable improvement with its Super AMOLED display, the Galaxy S4 is viewed as a weak successor. It also does not help that it closely resembles the Galaxy S3, making some users feel like they have not had an upgrade. The S4 is not a revolutionary device but it certainly is one of the best on the market at present.

The sales performance of the Galaxy S4 is blamed for the 13% drop in Samsung’s market capitalization last month as JPMorgan Chase & Co and Morgan Stanley lowered their Galaxy S4 sales estimates by up to 25%. Of note, 70% of Samsung’s total profit comes from its mobile business. The performance of its mobile division will certainly affect the company’s overall value.

What analysts are saying

A Seoul-based analyst at KB Investment & Securities Co, Byun Han Joon, noted that Samsung’s report “sharply missed the market expectation.” He added that analysts were initially worried about sales during the third and fourth quarter but were surprised and disappointed to know how the sales numbers for the second quarter turned out. Byun also mentioned that total smartphone shipments were 2 million lower than expected.

The Galaxy S4 may rightfully deserve the blame for the lower earnings. Nho Geun-Chang, an HMC Investment Securities analyst, believes that Samsung’s marketing expenses significantly increased with the launch of the Galaxy S4. Additionally, the company made significant investments in distribution channels across the United States.

On the other hand, a fund manager at Dongbu Asset Management, Jung Sang-jin, disagrees with comments that Samsung’s dominance has already waned. While he agrees that the disappointing sales can be attributed to the Galaxy S4, he believes that “Samsung has some exciting stuff up its sleeves.” Disclosure: Dongbu Asset Management owns Samsung shares.

Neil Mawston of Strategy Analytics has an interesting statement on Samsung’s predicament: “Apple is suffering from iPhone fatigue, while Samsung is suffering from Galaxy fatigue.” This is likely true considering how it isn’t difficult to find unfriendly comments online about Samsung, especially when it comes to its designs and use of plastic. Of course, this is assuming that Samsung’s rivals are not employing the infamous “fake web review and comment” scheme Samsung is accused of.

What happened to Samsung?

Samsung remains to be the top Android device seller by a long mile. The Galaxy S4 is currently the fastest-selling Android device, surpassing the record of its immediate predecessor which supposedly brought Samsung to the top of the smartphone market. Samsung’s problem now is not about sales but more on meeting expectations and preventing the further devaluation of its market capitalization.

The reaction from investors could be a temporary “shock” as Samsung lost one of its bragging points: being able to surpass sales forecasts. It is clear that the company made more than decent earnings for the second quarter. While other manufacturers struggle with their sales, Samsung continues to make money and is only let down by being unable to measure up to high expectations.

The decline in Samsung’s shares, however, needs to be quickly remedied because it is not comparable to that of Apple Inc’s decline in the earlier part of the year. Apple’s shares went down because analysts thought interest in the iPhone 5 already waned and because the company was not about to release a new device. In Samsung’s case, despite the availability of a brand new flagship, share value continued declining.

Outlook

Things can still change in the later part of the year as new products from Samsung are expected to be introduced. The Galaxy Note 3 and possibly a wearable tech device are being anticipated. Samsung, though, should be more mindful of expectations—not necessarily those of analysts but those of consumers.

The current flagship smatphone from Samsung already excels in terms of speed and battery longevity. What it failed to address is the buyers’ desire for a device with better design and build. It has to learn from the Galaxy S4 and iPhone situation. The iPhone similarly suffers criticisms over its rehashed design. On the contrary, HTC gained great praises and acclaim especially for its design, which is completely different from its predecessor’s. Similarly, it has been reported by Kantar that a significant 38% of Xperia Z owners in the UK are former Galaxy S2 owners. The shift is believed to be attributable to device design and build preferences.

Hopefully, Samsung announces new products that will demonstrate significant technological and aesthetic upgrades. Gone are the days when it can attract iPhone users to shift to a Galaxy. Samsung simply cannot play the alternative-to-iPhone card anymore. Ads that attack the iPhone are unlikely to work this time. The company has to demonstrate its willingness to change at least in the new products it will announce later this year.

By now, Apple’s customer base could primarily be those who have notably high levels of brand loyalty. Apple has even reportedly grabbed the number one spot for customer satisfaction in South Korea. It’s time for Samsung to adopt a new approach to product development and marketing as it now appears to be the new “Apple” in the Android realm.

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