EXPECTATION INFLATION

Yes, Samsung is acutely aware that we’ve reached “peak trophy smartphone”

July 26, 2013
July 26, 2013

South Korean electronics giant Samsung reported soaring profits on Friday, but despite the company’s attempts to manage expectations, the results undershot estimates and its stock dropped almost 1%. That’s on top of a 13% slump in June that wiped $26 billion off Samsung’s value—a bigger loss than Sony’s entire market capitalization.

This may seem odd, given that its flagship smartphone, the Galaxy S4, has flown off the shelf, supported by a super-sized marketing campaign. The problem is that amid steep competition, there aren’t many customers left who can afford flashy trophy phones and don’t already have one.

As a result, Samsung’s management is beginning to pivot away from its current reliance on the Galaxy series—it announced a $1 billion increase in investment expected to go to other businesses on Friday—even if it is still keen to tap into some developing markets still hungry for shiny high-end telephonic gadgets. It already leads the world in televisions, chips and displays, and recently launched a high-end OLED television. Its memory chip business announced a 71% increase in operating profit from last year, and it has a powerful reputation in many emerging markets.

Investors have good reason to be cautious, however. Smartphones account for around two-thirds of Samsung’s earnings and much of its innovation in the promising low-end smartphone segment involves cannibalizing the Galaxy. While investors are ready to buy rival Apple’s stock purely in expectation that the company will soon release a new life-changing gadget, Samsung is less able to conjure awe—its planned smart-watch will likely be stuck in the middle of the pack. Then there’s the worrying sign that it recently closed a department dedicated to finding new businesses because it failed to turn up anything significant.

If Samsung were to stick with high-end smartphones, it would still be wildly profitable for the next few years. But as this week’s results show, investors want more than profits—they want to know where the next big source of growth is coming from.

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