New York City, New York – (StockNewsDesk) – 10/30/2014 — Samsung announced an operating profit that was its lowest in three years, since the Galaxy line was introduced. The intense rivalry between Apple and Samsung has taken a decisive turn based on third-quarter results because of the booming sales of the iPhone 6 and iPhone 6 Plus. Samsung has gone from an innovator to playing catch up to win customers back.
Net Profit Tumbles
The scariest takeaway for Samsung’s investors was an almost 50% decline in net profits from the same quarter last year. The primary reason for this decline was the decreasing sales of Galaxy phones, as users migrated to new offerings from Apple, Nokia, Nexus, Motorola and LG. These competitors have caught up to the various offerings of Samsung and no longer are Samsung smartphones seen as the most progressive device.
The company’s overall profit came in at $4 billion, which fell short of analysts’ $5.3 billion estimate. Revenue came in at $45 billion, which was 20% less than last year’s third quarter. The decline in the stock price was blunted due to management already warning earlier in the month that it would be falling short of expectations. The company blamed it on weakness in its smartphone division and TV sales as the most culpable units for its underperformance. In addition to flagging sales, Samsung also cited increasing marketing costs to navigate the competitive environment with new products from basically all phone manufacturers.
New Phones Coming Soon
Samsung expressed optimism for its line of newest phones, which will be revealed in the fourth quarter. However, one issue that is clear from the latest earnings report and something Samsung will grapple with going forward is the almost commodity like conditions for Android based smartphones. Unlike Apple, Samsung has been unable to successfully keep pricing power and market dominance at the same time. This is the biggest differentiation between the two companies.
Like personal computers, tablets, or laptops, Android based smartphones are moving to a market environment in which the differences are subtle between products so consumers are mainly focusing on price, forcing most firms to focus on market share more than profits. Samsung is hoping to inject some life into the company with an overhaul of its entire product line, from the low-end to the top end. Of course, the research and development costs required for such an endeavor also affected the company’s profitability in the latest quarter.
Stock Price Impact
Samsung’s stock was actually up modestly on its announcement, certifying that this earnings miss was priced into the stock. Investors seem cautiously optimistic about Samsung’s plans to overhaul its phone line. However, Samsung’s stock price has been mired in bear market territory for months, as it is more than 30% off its 2014 high.
Recent weeks have seen intense selling pressure for Samsung, as the company made its bleak third quarter prospects public. The company is quite diversified with a memory and semiconductor division, which posted strong results as personal computer sales were up on a year over year basis. Also, the TV and home appliance division was weaker than expected on lower than expected durable goods spending and home sales. However, the largest source of growth remains the mobile division, so it makes sense that analysts and investors would pay more attention to it.