Signs of Life in a New Galaxy
Investors are betting that Samsung Electronics is poised to recoup its title as the world’s top maker of smartphones. For evidence, look no further than the $12 billion increase in the company’s market value since March 1, when it unveiled a pair of new handsets at the Mobile World Congress in Barcelona. The Korean giant is counting on the sixth generation of its flagship Galaxy phone, plus the second edition of the Edge, a phone with a screen that curves along its length, to put it back in the lead after it slipped into a tie with Apple in the fourth quarter. “We expect Samsung to regain its position as the world’s clear No. 1 by volume” in the first quarter of 2015, says Neil Mawston, executive director of Strategy Analytics.
Both Samsung devices have generated positive buzz among reviewers, many of whom panned the Galaxy’s previous iteration. Tech-focused website CNET tags the S6 a “stunner,” while the influential review site Wirecutter deems it the best Android premium handset. “The market, carriers, and even consumers are all on the same page that Samsung’s new phone is different from the past models,” says Keon Han, an analyst at Credit Suisse Group in Seoul.
At an event Samsung staged on April 9, a day before the new Galaxy went on sale in the U.S. and 19 other countries, the head of mobile sales and marketing, Lee Sang Chul, predicted “record sales” and said demand for the pricier Edge model would exceed supply. Samsung will ship 49.8 million S6 phones this year, according to an average of eight analysts recently polled by Bloomberg, which would be an improvement over the performance of the previous model but short of the high-water mark of more than 65 million set by the S3, which was released in 2012.
Samsung said earlier this month that its operating profit for the quarter ended on March 31 will likely slump 31 percent, to 5.9 trillion won ($5.4 billion). Its second-quarter profit, which would include S6 sales for the full three months, may rise to 7.4 trillion won, from 7.2 trillion won a year earlier, according to the average of 24 analyst estimates compiled by Bloomberg.
The road back for Samsung is steeper following Apple’s recent surge, driven by brisk sales of the bigger iPhones it introduced in September. Those handsets have lured away consumers from Galaxy devices. To better compete, Samsung has upgraded the materials used in the body of the S6, phasing out plastic in favor of a combination of glass and metal, mirroring the look of other premium handsets, including the iPhone and the HTC One, Galaxy’s main competitor among high-end Android phones. The S6 and the Edge also feature the latest generation of the Android operating system, called Lollipop, and are packed with Samsung’s most advanced parts, including its own processor and modem chips, as well as ultrathin screens, all of which will help bolster profit margins at its component businesses. Another key feature: a fingerprint reader that authenticates transactions on Samsung’s proprietary mobile payments software, the company’s answer to Apple Pay.
Mawston says the S6 will help shore up Samsung’s position in China and India, though he’s not counting on an “instant major recovery” in those markets. Competition from local rivals whittled the Korean company’s market share in China, the world’s largest mobile market, to 7.9 percent in the final quarter of 2014, from 18.8 percent a year earlier, according to figures compiled by researcher IDC. Beijing-based Xiaomi ascended to first place, with a 13.7 percent share in the fourth quarter, while Apple took second, with 12.3 percent. In India, Samsung is tussling with local upstart Micromax for leadership in the world’s fastest-growing mobile market, and researchers are divided over which company is ahead.
Samsung also faces a test in the U.S., where its market share slipped 7 percentage points, to 21.1 percent, according to Strategy Analytics. Apple, meanwhile, racked up 3 additional points, closing the year at 44.4 percent. Despite the widening gulf, the Korean company has resisted the temptation to underprice its American rival. The websites of Verizon, AT&T, and Sprint all list the price of a Galaxy S6 at $199, when purchased with a two-year service contract, which is on par with the iPhone 6. Lee Min Hee, an analyst at I’M Investment & Securities in Seoul, says he doubts that Samsung’s new handsets can turn the tide in the U.S., at least in the short term. “Many people shifted to Apple’s bigger iPhones late last year, so we can’t expect iPhone fans to switch back to a new Galaxy anytime soon.”
The bottom line: Samsung’s market value has jumped $12 billion since March amid high expectations for its new smartphones.