News broke early this past week that the Korean conglomerate had killed off its new Galaxy Note 7 phone and was asking consumers to immediately turn off and return the phones they had purchased.
Samsung had already recalled the phones last month after several customers reported exploding batteries in the original models, asking customers to turn in their phones for a new and improved Note 7. Then there were reports that the replacement phones’ batteries were exploding too.
Samsung Galaxy Note 7Upon this news, all the major cell phone carriers halted sales of the phones and Samsung stopped all production.
Things only got worse from there. As reports started coming out that the replacement phones were exploding, Samsung’s stock tanked. On Tuesday in Seoul, shares fell 8% wiping out $17 billion in market value before the company announced terminating the phones, after which the stock dropped even further.
Samsung, as you’d guess, is now in crisis mode. They’re scrambling to identify the cause of the exploding batteries and to explain how they could have missed the critical flaw causing the battery fires twice.
With the reports of the batteries exploding in the original phones, Samsung placed blame on the battery supplier. They then switched to an alternative supplier for the replacement phones, but as we now know, that didn’t end the problems.
In the wake of all of this, the company has cut its operating profit by $2.3 billion, which erases all of the mobile business profit analysts had been projecting. And it has been estimated that the termination of the high-end phone will cost the company about $5 billion in operating profit through 2017.
Thankfully for Samsung’s reputation, no one was killed or seriously injured by these exploding phones, and the company acted quickly to remove them from the market. And while the recall is one of the biggest in the technology industry, it is far from the worst in history (for the worst, I’d point to either Merck & Co.’s 2004 scandal with its drug Vioxx, which increased the chance of heart attacks and strokes in some patients, or Takata’s recent catastrophe with its faulty air bags).
But Samsung’s trouble has me wondering, who stands to gain the most from this crisis? Apple or Google?
The original expectations were that Samsung would sell 10 to 14 million of the Note 7s by the end of the year, but that number has now dropped to zero.
The big danger for the company is in how fast they can come to market with the Note 8. If they take too long, it will create a vacuum for competitors to creep in. But they can’t move fast enough to save themselves this year.
The termination of the Galaxy Note 7—which was released on August 19—means that Samsung has no high-end phone in the game heading into the critical holiday season when most consumers upgrade their phones.
Initially, it seemed that the Note 7 was capitalizing on a lackluster new iPhone release, but with the phone now dead, Apple has very little competition in the high-end cell phone market.
Samsung and Apple had essentially split the market for $700-plus smartphones, which makes Apple a natural beneficiary of Samsung’s disaster.
In the near term, customers will need replacement phones immediately now that they have been instructed to return their Note 7s, and right now their only comparable option is an iPhone.
However, Google recently announced its new Pixel phone. The sleek new Pixel will be available October 20, and is Google’s flagship smartphone. What will be appealing to consumers of the Note 7 is that the Pixel is also an Android, like the Note 7. However the Pixel is tethered to Verizon, so buyers on other networks are limited to the iPhone in the high-end category.
It remains to be seen whether or not consumers will make a shift to the iOS operating system, or stick with Android, but still, both Apple and Google will see a boost from Samsung’s debacle.
But from a valuation perspective, Apple is the better bet between the two.
At the beginning of the year, there was a lot of worry surrounding Apple largely focused on stagnating iPhone sales and its ability to grow in the smartphone category.
But in the latter half of the year, there has been a rerating of the stock based on signs that growth isn’t declining after all.
While there aren’t many first-time buyers in developed markets and most revenue for the iPhone comes from upgrades, Apple is actively expanding its distribution channels in China which is improving growth, and they are also experiencing growth in other emerging markets like India and Indonesia.
Additionally, wireless operators have said that sales are strong for the iPhone 7—and especially for the 7 Plus—which has resulted in more optimism that the company can still grow. Likely not the 30% growth seen a couple of years ago, but at Apple’s current valuation, any growth is attractive.
Apple’s valuation was low at the beginning of the year, and still is low at 13.64 compared to Google’s 31.16 P/E ratio. A P/E ratio, or Price to Earnings ratio, according to Investopedia is “the dollar amount an investor can expect to invest in a company in order to receive one dollar of that company’s earnings.”
Apple’s P/E ratio indicates that it is undervalued, giving investors a good buying opportunity. Apart from that, Apple offers a dividend of nearly 2%, which certainly doesn't hurt.
When news broke that Samsung was terminating the Note 7, shares of Apple jumped 1.7 percent to just over $116 per share. As numbers showing the company’s growth are released over the coming weeks and at year end, I believe the growth will be reflected in the share price making now a great time to take a position.
We’ll get data points in the coming weeks that will tell us definitively if Samsung’s Note 7 customers are jumping ship over to the iPhone 7—and by all accounts, it’s a probability that many of the 2.5 million Note 7 customers will do so—or if they’ll stay with the Android operating system opting for Google’s Pixel.
This is the first generation of the Pixel, which may scare away some potential buyers, and if consumers are worried about safety, Apple will benefit.
All of this positive news for Apple has given the company more time for R&D to develop new products that will all but surely help the company maintain its position as one of the most stable and profitable companies in the world.
As for Samsung, does the plunge from its Note 7 disaster create a buying opportunity? While the stock isn’t traded on a major U.S. exchange, it does make me think about how such negative situations can make for great buying opportunities. We’ll look at similar situations that other companies have faced—the previously mentioned Merck is one such example—and how their share prices responded in next week’s article.
source: Kristina Keene, Investiv