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Apple Inc. (AAPL), SAMSUNG ELECT LTD(F) (SSNLF): This Gadget Maker Is Diversifying

SAMSUNG ELECT LTD(F) (OTCMKTS:SSNLF)Earlier in June, the South Korean consumer electronics behemoth SAMSUNG ELECT LTD(F) (OTCMKTS:SSNLF) shed $12 billion in market cap after several analyst downgrades due to fears regarding the slowdown in sales of its Galaxy S4 smartphone.

Unlike Apple, SAMSUNG ELECT LTD(F) (OTCMKTS:SSNLF) manufactures a large variety of phones, of which the low-end ones have been doing great around the world, effectively fending off competition from the Chinese rivals, but the growth of its higher margin high end smartphone — the Galaxy S series — has been waning. The brisk growth of the lower margin operation could eventually drag Samsung’s profitability lower.

The fears were confirmed in its second quarter results which came in below estimates (that led to even more downgrades), but the company is now eyeing growth in the lucrative storage devices industry that is expected to grow rapidly in the coming years.

Smartphone Woes

Last year, SAMSUNG ELECT LTD(F) (OTCMKTS:SSNLF) became the world’s biggest smartphone maker, ahead of Apple Inc. (NASDAQ:AAPL), thanks to the phenomenal success of its Galaxy S series. However, investors now fear that like Apple Inc. (NASDAQ:AAPL), Samsung will now also find it difficult to maintain its margins.

Meanwhile, the much awaited results of Apple Inc. (NASDAQ:AAPL) are due on July 23. The company has been facing margin pressure from higher sales of lower-margin tablets and lower sales of higher-margin iPhones. Like the Galaxy S4, there have been fears regarding weakening demand of the iPhone 5.

Although, I am not too optimistic from this week’s earnings announcement but Verizon’s 3.9 million activated iPhones, which shows a 44% year-over-year increase, coupled with better performance from the App Store could translate into an earnings beat (although the key to a significant upside lies in a new product launch). Add Friday’s 1.6% drop to the equation and you have a tech giant trading at a discount at $425.

SAMSUNG ELECT LTD(F) (OTCMKTS:SSNLF) has a history of beating analysts’ estimates, but for the quarter ended in June its operating income came in at $8.3 billion, below the market’s expectations of $8.9 billion. The company also missed the sales estimates while smartphone shipments were 2 million below the consensus. JPMorgan Chase and Morgan Stanley have now lowered their Samsung’s annual shipment estimates by 20 million and 10 million respectively.

SAMSUNG ELECT LTD(F) (OTCMKTS:SSNLF) serves customers belonging to all income groups by selling an array of products at different price levels and therefore markets were expecting Samsung to deliver results in line with estimates.

The memory “drive”

Besides smartphones, SAMSUNG ELECT LTD(F) (OTCMKTS:SSNLF) is also the global leader when it comes to NAND flash memory chips used in phones and solid-state drives, or SSDs. An SSD is a memory storage device that is far more efficient and durable than a conventional hard disk commonly found in a PC. The company has recently unveiled some new SSDs, according to its official press release, “to expedite transition to SSDs.”

With the saturation coming in the smartphone market, the SSD market is expected to grow at a much faster pace than smartphone NAND chips. This year, the SSD demand will grow by an impressive 75% while the demand for smartphone NAND chips will grow by just 41% — coming down from 58% two years ago.

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