Samsung Galaxy S5 Features Mostly Evolutionary Upgrades: Stifel

Samsung Galaxy S5 Features Mostly Evolutionary Upgrades: Stifel
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Stifel analysts Aaron C. Rakers et al. discuss Samsung’s prospects as the Galaxy S5 is introduced at the MWC in Barcelona.

In general, we view the enhancements mostly evolutionary in nature though it’s clear that  Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) took into account many of the shortcomings of the original Gear product when designing Gear 2. We believe Samsung’s Galaxy S5 feature enhancements could leave investors to gauge slowing innovation in the smartphone industry going forward.

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Samsung unveiled Galaxy S5 and Galaxy Gear at MWC

News. Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) unveiled the Galaxy S5 and new Galaxy Gear this evening at Mobile World Congress in Barcelona. The phone has a slightly larger display than its predecessor, Galaxy S4. In addition, the  Galaxy S5 also includes new features such as fingerprint sensor, heart rate sensor, improved 16MP camera and, in terms of connectivity, is Cat. 4 capable, has 802.11ac with 2X2 MIMO Wi-Fi and has “Data Booster” that utilizes both LTE and Wi-Fi to improve download speeds. In terms of lifestyle improvements, the S5 is IP67 dust and water resistant and has a power saving mode. Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) also discussed improved security, “kid’s mode” and fitness applications.

By comparison, the iPhone 5s has an 8MP camera and does not include 802.11ac Wi-Fi (AAPL, $527.90, Buy; price is intraday).

Regarding the Gear family, Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) focused on five areas of improvements. 1) User experience, 2) Extended ecosystem, 3) more choices (less expensive Neo and fitness focused Fit, 4) improved battery life (3 days vs. 1 day) and 5) water and dust resistant.

The new devices will be available in a 150 countries on April 11, though no pricing details were given.

Overall, the products look incrementally improved vs. the currently available product offering. With a fingerprint sensor, Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) looks to have a more secure platform that suitable for mobile payments.

Target Price Methodology/Risks

Stifel’s $650 target price reflects a weighted valuation methodology using a 13x P/E, ~8x EV/EBITDA, and 12x EV/FCF multiples on their FY15 estimates, as well as a modest weighting to our 10-year discounted cash flow model, using a ~9% WACC and a low double-digit revenue growth rate over the next couple of years, followed by a low single-digit growth rate thereafter. Risks to our target price include: (1) Reinventing product momentum – can Apple Inc. (NASDAQ:AAPL) sustain current level of product innovation?; (2) Emerging competition for iPad and MacBook Air; (3) Wireless carriers looking to push back on iPhone subsidies; (4) Slowdown in Chinese growth impacting expanding operations in the country; (5) Legal disputes (e.g. Samsung tablet litigation); and (6) Execution missteps.

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