As the next wave of court hearings over patent disputes between Apple and Samsung rage on, investors are growing tepid over Samsung stock, which lost one fifth of its value from June to to mid-July. But it’s not Samsung’s viability that has some investors worried; the Korean handset maker currently makes 1 out of every 3 phones sold worldwide. It sells more than twice as many as its next closest competitor, Apple.
Rather, the concern is how Samsung will adapt to, as many see it, the inevitable commoditization of the mobile phone industry. As smartphones become more widely available and the market reaches saturation, smartphones are forced to compete on specifications and price rather than differences in design and innovative technologies, resulting in a drain of profits from the industry. This is largely what has happened in the Desktop and Laptop PC markets. Additionally, Samsung has been rather conservative in payout to shareholders, in dividends and stock buyouts, which have fallen from 50% in 2004 to now 5% of Samsung’s net income; all of this despite a 50 billion dollar cash pile. It’s current dividend, which is about 0.5 percent of it’s stock price, is well below industry standards, and makes people hesitant to invest in Samsung in the first place.
In response to these qualms, Samsung invited 350 market analyst and institutional investors to Seoul Hotel for a chance to hear Samsung’s plans moving forward from its upper management in person. Executives emphasized that Samsung’s strength lies in its manufacturing power and diversity. Unlike almost every other smartphone manufacturer, Samsung develops, manufactures, and assembles the majority of it’s major components in house. Not only does Samsung also account for one third of all memory chips manufactured world wide, it provides many other components like processors and displays to many of its competitors in the industry. This is not including the variety of other electronics Samsung Manufactures from televisions to washing machines.
As the two market leaders in the mobile phone space, Samsung and Apple have pursued two different routes for vertical integration. While Samsung has emphasized hardware integration, Apple has masterfully succeeded in integrating hardware and software. This kind of integration is becoming increasingly valuable and is what allows Apple to gain more profit from each smartphone sold compared to Samsung. Samsung has acknowledged that this remains a large area of potential growth moving forward.
In addition, Samsung promises a more aggressive business strategy in the future. The company intends to double its dividend rate to roughly 1 percent of stock price; while this is the prevailing industry standard, it will continue to lag behind rivals like Apple which currently have a yield of 2.3 percent. The company has already begun to spend more aggressively and plans to continue; through buy-ups and mergers, the company hopes to find additional areas of growth. Among Samsung’s strategy to gain appeal among international investors is potentially a listing of American depositary receipts; allowing individual Americans to buy in to Samsung without the actual stocks ever actually leaving the local South Korean market.
Whether or not these promises will make an impact on investor confidence remains to be seen, as investor reactions after the event were generally mixed. However, we can be sure that they will all be closely monitoring what Samsung does next.
