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June 07, 2013

Samsung Stock Takes $12 Billion Hit on Misplaced Issues of Galaxy S4 Sales and Margin Drops

Back in February of this year, we wrote an analysis focused on the drop in Apple's stock price. We believe that Apple's (News - Alert) business remains fundamentally sound and that there is no real reason for Apple's stock to have skyrocketed and then plunged, aside from the usually idiotic ramblings of the financial community. Samsung (News - Alert), meanwhile, probably took no particular pleasure in watching Apple's stock drop, although it no doubt loved sitting in the middle of some of the financial side arguments that focused on Apple margins being hit and Samsung's diverse collection of devices and price points being responsible for it.

Apple had suddenly become a financial pariah while Samsung was glowing. Ah, but the financial community is a fickle bunch, and now they have turned their sights on…Samsung.

Samsung ended Thursday down 6.2 percent, to 1,427,000 won ($1,275), resulting in a market cap loss of $12.4 billion, down to $187.8 billion. In this particular case the drop can be traced to J.P. Morgan's J.J. Park, an analyst who has alarmed the world with projections of lower Q3 2013 sales of the Galaxy S4.

Our own position on the Galaxy S4, dating back to the day it launched, has been that expectations for total sales of the device have been pushed far out beyond reasonable expectations. We're certainly not surprised to hear that Samsung may sell fewer S4s than what we believe have been wild expectations.

As always, we turn back to the financial analysts who over-promised and as usual are now under-delivering. Why, we want to know, didn't the financial analysts properly figure out that S4 sales would not be spectacular? Were they sold on Samsung's fabulous marketing hype? It's one thing for consumers to buy into the well-executed marketing, but another for financial analysts to succumb.

Meanwhile, as Samsung continues to follow what is an extremely well-defined game plan of delivering smartphones and tablets into every conceivable niche ongoing -- in terms of both device size and price points -- the financial investment community is "suddenly" waking up to the fact that Samsung will sell far more of the lower price point devices than the high end devices! Lower sales of the Galaxy S4 will "kill" Samsung's margins! Hence the major hit yesterday on its stock price. This is the same bogus argument that sank Apple's stock price.

It is also worth noting that the investment community is now waking up to the fact that soon enough it will be Apple's turn to step back into the limelight. Coupled with what will be a new iOS and (whether it happens this coming Monday at Apples developer's conference or at some point just down the road at its own specific iPhone (News - Alert) event) new devices from Apple, the analysts are suddenly doing a double take. Might Apple rebound enough to add an even larger brake to the Samsung machine?

One last thing worth noting is that Apple is expected to introduce an iPhone exchange program, where it will allow users to trade in older iPhones for newer iPhones. This would be interesting, depending on how its carried out and under what conditions. Will it render T-Mobile's (News - Alert) argument of not being locked into a two year contract and cycle that precludes upgrades moot? Will it hurt upgrade cycles at AT&T and Verizon? Interesting questions both. But the real issue relative to Samsung is whether or not such a program is likely to harm Galaxy S4 sales. Would it? Very likely, but not to the extent that would excuse the original and greatly exaggerated S4 sales estimates.

Is the new Samsung stock price point reasonable? Regardless of the drop Samsung may still be overpriced. Much depends on what Apple brings to the game over the next few months. If there is real innovation to be had Samsung will drop a lot more. If Apple fails to deliver on real innovation then Samsung will likely look right-priced.

Our advice is simple (but remember what they say about free advice) -- do not underestimate Apple. The company is now due to deliver on a number of new innovation cycles that will change market dynamics back in its favor. That is our belief - and this means that for us Apple is now right-priced and Samsung should be shorted.

We love the wisdom of financial analysts.

Edited by Rich Steeves

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