Put simply — for the near term, and perhaps longer — the impact of Samsung’s exploding handsets, is very bullish for Apple
Samsung is losing marketshare and mindshare over the very real threat of injury or fire from these Samsung handsets. And while that’s a problem, they have a bigger one.
Samsung had completely rebranded itself as a high-end electronics and Smartphone vendor over the last 10 years. While exploding phones and branding issues are problems, the biggest problem for Samsung’s handset business, as I’ve been saying for four years now, is that it doesn’t own the platform. It’s just a hardware vendor. It’s a smartphone version of computer vendors Dell or Gateway.
owned the Windows platform, and it’s still one of the most valuable companies on the planet because of that, even as Dell, Gateway, HP
and so many other computer hardware vendors made little money and created little long-term value for shareholders. Google
owns Android, and we’ve seen the smartphone hardware vendors (outside of Apple) struggle to make money (see Motorola, HTC, etc.).
Meanwhile, into this remarkable collapse in the Samsung brand and marketshare, here comes the iPhone 7.
I’ll be sticking with the companies that own the smartphone platforms — Apple and Google. I predicted that Samsung would eventually collapse from its smartphone hardware strategy a few years ago when I wrote:
“Samsung is riding a wave of popularity and sales that’s reminiscent of Nokia (NOK) in 2008. Or of Motorola (MOT) in the Razr heydays. Or of Research in Motion (RIMM) when everybody wanted a Blackberry. But wait a minute. How’s Nokia doing today? Or RIM? At some point, it’s inevitable. The Samsung wave, too, will crash. Hard. And the risk to a manufacturer like Samsung is that when that tide changes, its margins can plummet. Do you have a Samsung ecosystem? Or an Android ecosystem? Isn’t Google the platform play that I preach about so much? Platforms create revolutions. Revolutions make great investments. Hardware vendors with nothing to lock you into their brand do not create revolutions.”
It’s the margins that are most at risk for Samsung as a result of these exploding smartphones. The company could spend up to $1 billion to recall and replace these Galaxy 7 handsets. That’s bad enough, but the need to improve Samsung’s manufacturing process and supply chain will also be costly to Samsung’s handset margins for many years to come. If the public’s demand for Samsung handsets doesn’t come back strongly and drive Samsung sales volumes back near pre-Galaxy 7 levels, the margins will never come back. Ask GoPro
about trying to keep margins high when sales unit volumes drop.
Samsung’s stock has been hit for 10% over the last few days since the smartphone blow ups blew up. But it’s still higher this year than it was last year. I’d like to short some Samsung, but I can’t find any to borrow and there aren’t any options that trade on the Samsung stock here in the U.S. (yet).
But I have come up with an alternative way to play it. The South Korean ETF iShares MSCI South Korea Capped ETF
of which Samsung makes up 20%. Paired with an Apple and Google long as I am (You can see my longs and shorts at TradingWithCody.com.), the risk/reward of a Samsung short over the next six months looks very compelling.