Samsung – Bones of phones.

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There’s nothing wrong with being a component company. 

• The latest flagship devices continue to show very clearly where Samsung’s future lies and it is not in being a highflying phone maker.
• Samsung has launched two new devices, Galaxy Note 5 and the Galaxy 6 edge+.
• The Note 5 is the next version of the popular phablet and in that guise continues to have dedicated software geared towards productivity and an integrated stylus.
• The Galaxy s6 edge+ is a larger version of the s6 edge with a 5.7” display compared to the original s6 edge at 5.1”.
• This puts the s6 edge + almost exactly in line with the iPhone 6+ which has a 5.5” screen.
• Other than that there is very little to say about these devices other than both of them are the most powerful, nicest looking Android devices in the market today.
• Both of these devices are differentiated by the components that go into them rather than any particular function that they may be able to carry out.
• In almost every instance, the components that provide that differentiation are in house from Samsung and are not yet available on any other device.
• However, this is no longer enough as the real money in the mobile industry is made in the ecosystem where Apple and Google are making more than 100% of industry profits between them.
• After a short, but sharp, battle with Google over the ecosystem (see here), Samsung has retreated meaning that it can only now differentiate itself through hardware.
• This differentiation combined with a substantial volume advantage over its closes rival is enough to allow Samsung to earn 11-12% EBIT margins on Android phones but no more.
• The real collapse in Samsung’s fortunes occurred in Q3 14A meaning that the tough year over year comparisons have now in the past.
• Q3 15E will be compared to one of the worst quarters that Samsung has had for many years meaning that there should be no negative headlines.
• Furthermore, Samsung’s components business (Device Solutions) continues to go from strength to strength and I think that this will be the engine of growth from here on.
• Growth is going to be far lower than it has been in the past, but both expectations and the share price are also now far lower than in its heyday.
• Consequently, the outlook for Samsung is really now about the supply of components to other manufacturers which is something that Samsung knows how to do really well.
• There is a risk of a further collapse in handset margins but at the moment its volumes are still so much bigger than anyone else’s in Android that this is unlikely to happen any time soon.
• Samsung is still very cheap and unloved and I think that the worst is already behind it.
• I have been very negative on Samsung for the last 18 months, but I think that a time is approaching when it could offer value for investors once again.