Wide Range of Products Strengthen Samsung Electronics (005930: Korea SE)

By Thomas Copeland on October 22, 2014 Technology & Software

Although Samsung (005930: Korea SE) is most famous for its smartphones (the Galaxy series to be specific), the electronics company is actually strong in multiple departments, with its displays as well as chips topping sales in the market.

Due to Samsung’s exploding demand in recent years, analysts had begun to wonder whether Samsung (005930: Korea SE) would become as big as Apple Inc. (NASDAQ: AAPL) within the second decade of the 21^st century. However, this seems unlikely to happen now, considering how quickly Apple has caught onto Samsung (005930: Korea SE) with its latest phablet iPhone 6 Plus, which rivals the Samsung Galaxy Note directly.

Regardless, there is an edge Samsung (005930: Korea SE) has which Apple cannot compete with yet: the chips, displays and other parts which Samsung (005930: Korea SE) is able to make at a cheap valuation.

In 2010, when Samsung (005930: Korea SE) first launched its Galaxy series in the market, Samsung profits rose drastically, with its smartphone wing accounting for almost two-thirds of the total operating profit of the company. However, as competition increased, so fell Samsung’s figures. This year’s third quarterly figures have been disappointing for Samsung Electronics (005930: Korea SE), which has seen a 60% decline in operating profit.

Samsung (005930: Korea SE) shares have also fallen by almost 20% in the Korean Stock Exchange.

Analysts are not highly optimistic about the final quarterly figures of Samsung (005930: Korea SE) as well, considering the tough competition Apple (NASDAQ: AAPL) poses. Even though Samsung (005930: Korea SE) is all set to launch its Galaxy Note 4, Apple has already dominated the market with its iPhone 6 Plus, Apple’s own version of a phablet, to rival its Samsung counterpart.

Another downside which Samsung (005930: Korea SE) faces is with the proliferation of the Android system in the Chinese cell-phone market. Since all Chinese cell-phone brands are utilizing the potential of the Android OS in their devices, Samsung devices, which are using the same OS, lose out much of the edge.

However, things are better off in the components department of Samsung Electronics (005930: Korea SE). Samsung (005930: Korea SE) is now the market dominant force in the market for memory chips. It faces minimal competition now, as most of the competitors have been flushed out by Samsung and a few other profitable players.

But Samsung’s problems may not stem from tough competition at all. According to analysts, Samsung (005930: Korea SE) has had poor stock management which has devalued its stock valuation drastically. To improve valuation, Samsung (005930: Korea SE) must give back to shareholders from its massive cash reserves, something Samsung has been reluctant to do.

Analysts point to the Lee family, who run Samsung Electronics (005930: Korea SE), and suggest the move to give back to shareholders is postponed as the Lee family holds only a little share in the company itself. So giving back offers little incentive to them.

Unless the Lee family unlocks the true valuation of the Samsung (005930: Korea SE) stock, investors will have to trust the company’s smartphone business to invest.