Last updated: July 8, 2014 11:25 pm

Samsung: going the distance

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At front of the pack, someone is always nipping at your heels

At the front of the pack, there is always someone nipping at your heels. Samsung, a former Apple-chaser, has nipped its share. Now an established leader, its own feet are in danger.

Falling star?

Falling star?

On Tuesday, the pack got a bit closer. Second-quarter earnings were a tenth below analysts’ expectations, with competition in Europe and China partly to blame. Other excuses: unfavourable currency movements, seasonality and delayed purchasing ahead of 4G launches due this quarter in China. The stock was unmoved. The outlook is “cautiously” more positive and an executive had already let slip that the quarter was “not that good”.

Is the sanguine response warranted? Yes, the stock is cheap, at 7 times forward earnings, less than half Apple’s 15. But that partly reflects a conglomerate discount. More importantly, Samsung faces headwinds in smartphones – more than 40 per cent of revenues, according to Berenberg. International Data Corporation forecasts worldwide smartphone volumes will grow only a fifth in 2014, down from two-fifths in 2013. The US and EU – where consumers buy pricier phones – will see growth drop to single-digits, driving average selling prices down from $335 in 2013 to $260 by 2017.

This hurts margins. Berenberg estimates that if Samsung achieves operating margins of about 30 per cent in high end models, the lower end is making only up to 5 per cent.

Samsung is a vertically integrated, successful hardware manufacturer, but it is no bold innovator. Nor does it excel at content: it cannot break even on hardware and then make money on services or ecommerce, as Xiaomi and Amazon do. The company is trying to differentiate its products with a new operating system, Tizen, but previous attempts to break the iOS/Android duopoly have failed spectacularly.

Samsung hopes its future lies in devices for the Internet of Things. Meanwhile, investors may still hope for a release of some of its $60bn cash pile – a move that boosted Apple shares. But by that measure, the fruit is clearly ahead.

Tweet the Lex team at @FTLex

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