The future looks bright for Samsung as it charges pass Apple

I. Awesome Earnings, Despite Business Transition

Samsung Electronics Comp., Ltd. (SEO 005930) is predicting 28 million smartphones sold globally in calendar Q3 2011, which ended August.  That number would likely allow it to depose Apple to become the world's top maker of smartphones.

Most of Samsung's sales are of Android handsets, but the company is hedging its bets, releasing a new smartphone based on Microsoft's Windows Phone 7.5 "Mango", later this month.

Samsung says that it is expected to reveal earnings of 4.2T won ($3.5B USD), much more than the consensus forecast of 3.4T won by analysts surveyed by Thomson Reuters I/B/E/S, and more even than the bullish street view of 3.9T.  That would represent a gain of 12 percent over the previous quarter.

Samsung Galaxy S II
Samsung is poised to become the world's top manufacturer of smartphones. [Source: Samsung]

While it also represents a drop of 14 percent of earnings from the same quarter a year before, investors greeted the news with optimism.  Samsung is currently transititioning from an earnings foundation of electronics component sales, to a profit model founded on device sales, such as smartphones and tablets.  A drop in earnings is expected as Samsung eases into this new model -- the good news is that drop appears to be much smaller than even the analysts' relatively optimistic predictions.

II. Some Risks Loom for Samsung

Samsung isn't without its concerns.  

Memory prices are weakening -- they dropped 50 percent over the corner, with Citi and UBS believing that Samsung is the only memory maker still profitable.  In a way that's a good thing for Samsung, because the field of competitors may soon shrink, raising prices.  But in a short term it's also a bad thing for the company in terms of profitability.  While Samsung's DRAM may still turn a profit, that profit is much lower than before.

Samsung DRAM
Samsung is reportedly the last profitable DRAM manufacturer. [Source: regmedia]

Apple is reportedly looking to phase it out as its NAND flash supplier.  Flat screen prices are also weakening.  

Samsung also could face some backlash due to the fact that it's currently thriving off an inflationary currency.  The U.S. government is upset at South Korea and China for allowing rampant inflation, which makes these nations' products cheaper to U.S. consumers that offerings from domestic firms.

III. Outlook is Bright

But analysts seem inspired by Samsung's better than expected earnings and smartphone sales.  Some analysts go as far as to argue that Apple's new iPhone 4S -- which some complained lacked enough improvements -- won't be much of a challenge for Samsung's flagship Galaxy S II.  States Kyung Woo-hyun, a fund manager at Daishin Asset Management, "The Galaxy S II probably played a key role in boosting the company's earnings and it will continue to do so pretty much unchallenged, until Apple unveils a better new version of iPhone."

Ahn Seong-ho, an analyst at Hanwha Securities, went as far as to say, "I previously thought Apple's new iPhone would slow Samsung's handset earnings momentum, but there was no iPhone 5, and the iPhone 4S will not be a burden on Samsung in the fourth quarter."

But Samsung is not resting on its laurels.  It's reportedly preparing to unveil new higher resolution Android smartphones, including the flagship Android 3.5 "Ice Cream Sandwich model, the Nexus Prime.

On the tablet front, despite recent traction from new entrant, Inc. (AMZN), Samsung is still the most clear cut challenger to Apple.  In that sector Samsung hopes to boost sales with a refreshed 7-inch tablet (the Galaxy Tab 7 Plus) and a smartphone-tablet hybrid, the Galaxy Note (5.3-inch), which join a diverse family of tablets and smartphones spanning many sizes.

Current Galaxy device family

Despite having a market cap of only $118B USD (lower than some American tech giants like Apple), Samsung has the world's highest revenue of any technology firm -- $180B USD -- according to the Reuters.  Last quarter Apple -- who has the world's largest market cap -- was number one in smartphones and tablets.  This quarter it looks like Samsung may seize first place in smartphone sales and creep closer to Apple in tablet sales.

Source: Reuters

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