Apple Inc. (NASDAQ:AAPL) and Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) together earn almost 100% of smartphone profits. The two have grown substantially over the past few years as demand for smartphones and tablets skyrocketed. Research firms Societe Generale and JI Asia Research evaluate both stocks to figure out which of the two behemoths is a better investment opportunity in the next 12 months.
Lack of 4G availability to affect Apple’s growth
Societe Generale analysts Andy Perkins and Peter Knox argue that the high-end smartphone and tablet market will continue to grow, but at a slower rate. They estimate the high-end segment to have increased 15% in 2013. The slowdown is caused by under-investment in 4G infrastructure in certain regions. But the demand for high-end smartphones will pick up by 2015 as 4G availability increases in Europe and China.
However, the low-end smartphone segment (below $400) will continue to grow rapidly for at least the next three years. Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) rules this segment. But the growth will come with increasing competition from Chinese manufacturers.
Apple vs. Samsung: opportunities
The U.S. tech giant’s sales are expected to grow 7.3% annually through 2016, compared to just 4.6% for Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930). Apple Inc. (NASDAQ:AAPL) has full control over its operating system, so the company controls its revenues as well. The iPhone maker takes a 30% cut on every purchase through its App Store. It is just one of the benefits of having full control over its ecosystem.
But the Korean company depends on Android. So, it has no access to the revenues coming from Android apps, and has no ‘formal’ input into the direction of the development. The company has realized this weakness. Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) is trying to address this issue with its alternative Tizen OS and Knox security platform.
Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) has been the pioneer of the large screen size trend. It has multiple products with different screen sizes. The company is well-positioned if demand for different sizes continues to soar. On the other hand, Apple Inc. (NASDAQ:AAPL)’s flagship smartphones are just 4 inches in size. However, the upcoming iPhone 6 is likely to have a bigger screen. Analysts say the addition of a larger model will boost its sales as long as it doesn’t sacrifice other parts of the user experience.
Apple Inc. (NASDAQ:AAPL) and Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) both have a strong presence in the rapidly expanding tablet market. While Samsung has tablets in various price points, Apple remains focused on the high-end market. Commoditization of the low-end tablet market means the iPad maker is unlikely to chase this market. Instead, it will rely on its advantage in apps and ease of use. Wearable technology will be a good fit for both companies.
Apple vs. Samsung in charts
Apple in a stronger position over the long-term
Societe Generale says that Apple Inc. (NASDAQ:AAPL) is in a stronger position than Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) over the longer-term. Users have the safety of iTunes for content, and availability of support through iTunes and its retail network. That creates a premium user experience, resulting in increased customer loyalty. That’s why Apple has more repeat business than any of its competitors. The income from iTunes store and apps is growing rapidly, and it’s not dependent on the number of products sold in any given quarter. It’s a result of an installed user base.
However, markets support Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930)’s operations better in the short-term. Apple Inc. (NASDAQ:AAPL) doesn’t compete in mid- and low-range segments, which are currently witnessing stronger growth. It has greater cost control due to its size and internal components. Moreover, Samsung’s Knox security platform is addressing the corporate market aggressively.
Societe Generale has a Hold rating on Apple Inc. (NASDAQ:AAPL) with $575 price target. On the other hand, JI Asia Research has increased its price target on Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) from KRW1,040,000 to KRW1,583,000 with a Buy rating on potential market share gains, and greater cost control.