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Trade Alert: The loser of the smartphone wars

September 13, 2016 by Cody Willard

Red day in the markets as stocks and oil struggle following yesterday’s pop which followed Friday’s tanking. Easy does it out there. I’m in no rush and am eyeing some new picks that I’d like to sneak in and nibble on at lower prices if I can get them. Is that how most traders are positioned though? Wanting lower prices? That was certainly the case since the Brexit lows, but I’m not so sure most traders are wanting a pullback now.
I do however have a new starter short position I’m adding today, as I analyze what’s going on with the handset business with the two largest vendors of smartphones heading in opposite directions right now.

Put simply – for the near-term, and perhaps longer, the impact of Samsung’s exploding handsets, is very bullish for Apple. Samsung is losing marketshare and mindshare and the very real threat of injury or fire from these Samsung handsets reminds everyone of Samsung’s olden days as a cheap knockoff of leading electronic brands like Sony. Remember when you’d see Samsung cassette players for sale for $5 or so at the gas station?

Samsung had completely rebranded itself as a high-end electronics and smartphone vendor over the last ten years. While exploding phones and branding issues are problems, the biggest problem for Samsung’s handset business is, as I’ve been saying for four years now, that it doesn’t own the platform. It’s just a hardware vendor. It’s a smartphone version of computer vendors Dell or Gateway. Microsoft owned the Windows platform and it’s still one of the most valuable companies on the planet because of that, even as Dell, Gateway, HP and so many other computer hardware vendors made little money and created little long-term value for shareholders. Google owns Android and we’ve seen the smartphone hardware vendors (outside of Apple) struggle to make money (see Motorola, HTC, etc).

Meanwhile into this remarkable collapse in the Samsung brand and marketshare, here comes the iPhone 7. Nobody’s really

I’ll be sticking with the companies that own the smartphone platforms — Apple and Google. I predicted that Samsung would eventually collapse from its smartphone hardware strategy a few years ago when I wrote:

“Samsung is riding a wave of popularity and sales that’s reminiscent of Nokia in 2008.  Or of Motorola in the Razr heydays.  Or of Research in Motion when everybody wanted a Blackberry.  But wait a minute.  How’s Nokia doing today?  Or RIM? At some point, it’s inevitable.  The Samsung wave too will crash.  Hard.  And the risk to a manufacturer likeSamsung is that when that tide changes, its margins can plummet. Do you have a Samsung eco-system? Or an Android eco-system? Isn’t Google the platform play that I preach about so much. Platforms create revolutions. Revolutions make great investments. Hardware vendors with nothing to lock you in to their brand do not create revolutions.”

It’s the margins that are most at risk for Samsung as a result of these exploding smartphones. The company is spending billions to recall and replace these Galaxy 7 handsets. That’s bad enough, but the need to improve Samsung’s manufacturing process and supply chain will also be costly to Samsung’s handset margins for many years to come. If the public’s demand for Samsung handsets doesn’t come back strongly and drive Samsung sales volumes back near pre-Galaxy 7 levels, the margins will never come back. Ask GoPro about trying to keep margins high when sales unit volumes drop.

Samsung’s stock has been hit for 10% over the last few days since the smartphone blow ups blew up. But it’s still higher this year than it was last year. I’d like to short some Samsung but I can’t find any to borrow and there aren’t any options that trade on the Samsung stock here in the US (yet). However, Samsung makes up a full 20% of EWY, the South Korean stock market ETF. So I’m shorting a starter position in the EWY, maybe 1/5th full-size for now.

 

 

 

 

Related posts:

Where I'd Buy More Of Each Of Our Stocks
Trade Alert: Now is not the time to panic
Trade Alert: Trimming two stocks PLUS My Jay Leno interview, Cute kid/pet contest
Trade Alert: Gaming a gamer
Trade Alert: Taking some put profits as the markets hissy fit about the Fed
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Disclosure: At the time of publication, the firm in which Willard is a partner and/or Mr. Willard had positions in some of the stocks mentioned above although positions can change at any time and without notice.

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This does not constitute an offer to sell, a solicitation of an offer to buy, or a recommendation of any security or cryptocurrency or token any other product or service by Cody Willard or any other third party. Furthermore, nothing in this is intended to provide tax, legal, or investment advice and nothing in this should be construed as a recommendation to buy, sell, or hold any investment or security or cryptocurrency or token or to engage in any investment strategy or transaction. You are solely responsible for determining whether any investment, investment strategy, security or related transaction is appropriate for you based on your personal investment objectives, financial circumstances and risk tolerance. You should consult your business advisor, attorney, or tax and accounting advisor regarding your specific business, legal or tax situation.

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