When it comes to premium smartphones, Apple Inc’s (NASDAQ: AAPL) iPhone and Samsung Electronics Co Ltd’s (KRX: 5930) Galaxy are top of almost everyone’s lists. Both are stylish, state-of-the-art, and affordable luxury items. Given their scale and profits, Apple and Samsung are also on the top of the list of the largest companies by revenue and market capitalisation.
Comparing the two isn’t exactly apples to apples. Samsung doesn’t depend as much on smartphones as Apple does for its profits. For the three months ended June, Samsung’s mobile business accounted for around 23% of operating profits of 1.56 trillion Korean won (US$1.33 billion).
Meanwhile, iPhone sales accounted for 48.3% of Apple’s quarterly sales for the quarter ended June and the majority of Apple’s profits were directly or indirectly dependent on its iPhone.
While the two have their differences, they each share commonalities such as benefitting from the increased spending power of the global middle class, which will be a secular tailwind for years to come.
Both stocks could be potentially good investments. But which company is the better buy for the long-term investor?
Latest quarterly earnings
In terms of recent quarterly results, Apple’s profits haven’t shrunk as much as Samsung’s. For the quarter ended June, Apple reported quarterly earnings per diluted share of US$2.18, down 7% year-on-year. For the same period, Samsung’s operating profit fell 55.6% year-on-year to 6.6 trillion Korean won (US$5.6 billion).
Although both companies’ smartphone divisions suffered due to global smartphone shipments shrinking 2.3% year-on-year, Samsung’s profits fell more because it’s much more of a semiconductor-focused company.
Samsung’s semiconductor division accounts for around half of its profits and the division saw operating profit decline by 71% year-on-year.
China vs. the US
In the coming years, whether Samsung’s stock does better than Apple’s depends partly on whether the US moves further away from China or if ties between the two countries recover.
Samsung arguably is less exposed to the trade tensions than Apple is. This is because Samsung’s China smartphone business is pretty much nonexistent already, with a market share of less than 1%. Therefore, Samsung’s smartphone business isn’t as dependent on China as Apple, where Greater China for around 17% of its sales.
Samsung also benefits from the US-China trade war in that the Korean company has gained market share at Huawei’s expense in Europe. Huawei is arguably Samsung’s biggest global Android competitor, and Samsung has gained European customers due to the perception that Huawei potentially won’t be allowed to use Google services in its phones.
If the trade tensions continue in the long run, Samsung might also not face as much pricing pressure outside of China when China builds its own memory chips. Given the recent talk by Trump on a potential trade deal, it seems that the trade tensions between China and the US will improve.
In the long term, Apple might be the better buy simply because it has its own operating system and a better brand. Samsung lost almost all of its market share in China due to some strategic mistakes and the fact that it uses Android, an open source operating system.
Given how competitive Chinese companies have become, Samsung will face more pressure from Chinese companies in the long run in both smartphones and semiconductors.
HK MoneyClub (www.hkmoneyclub.com)