Better Buy: Apple vs. Samsung

Samsung (OTC: SSNLF) and Apple (NASDAQ:AAPL) are the No. 1 and No. 3 smartphone brands respectively in terms of global units sold, although Apple’s premium brand allows it to take the lion’s share of industry profits. As the smartphone is perhaps the most important technological device so far this century, most investors are familiar with these two large-cap companies because of this intense rivalry.

Yet while most consumers think of Apple and Samsung as smartphone companies, it’s perhaps the other parts of each company’s business that most define and set them apart. Therefore, if you are considering buying shares of either of these two market leaders, you need to understand their non-smartphone businesses. This will help you determine which stock is the best buy for your portfolio today.

Apple’s business model: from hardware to services

Perhaps the most important distinction between these two companies is that Apple is much more of a consumer brand and ecosystem, while Samsung is more of an industrial conglomerate with large economies of scale.

Here’s Apple’s revenue breakdown by product last quarter:

Product Share of overall turnover
iPhone 48.3%
Mac 10.8%
iPad 9.3%
Wearables 10.3%
Services 21.3%

Data source: Apple’s fiscal year 2019 third quarter financial results release.

What most sets Apple apart is its growing services division. As you can see, its services, which include Apple Care, Apple Music, iCloud and App Store commissions, generated just over 20% of revenue last quarter and grew nearly 13% from one year to the next. Also included in this revenue base are approximately 420 million recurring paid subscriptions, which the market tends to value more than hardware. As services and subscriptions grow as a percentage of Apple’s overall revenue base, the company could start to get a higher multiple in the market.

However, Apple is expected to unveil even more services this year, with four major new services coming or about to hit the market: Apple News+, Apple Arcade, Apple Credit Card and Apple TV+. These four new services have the potential to significantly increase the contribution of Apple’s services in the future.

Additionally, CEO Tim Cook is also quite optimistic about Apple’s health initiatives. Although health monitoring is not yet very lucrative, Cook said that in a few years, Apple may be better known for its contribution to health services, even more so than its phones.

The Apple-Samsung rivalry is not limited to cellphones. Image source: Getty Images.

Samsung’s business model: chips and semiconductors dominate

Samsung is Korea’s largest company, a sprawling conglomerate spanning phones, consumer devices and, most importantly, memory and semiconductor chips. As you can see, smartphones aren’t even Samsung’s main profit center.

product unit Revenue percentage Percentage of operating profit
Consumer electronics (TVs, monitors, refrigerators, air conditioners) 19.7% 10.8%
Information technology and mobile (mobile phones and computers) 46.1% 23.6%
Semiconductors (memory chips and foundry) 28.7% 51.6%
Displays (LCD and OLED panels) 13.6% 11.4%
Harman (connected car systems) 0.4% 1.4%

Q2 2019. Data source: Samsung quarterly reports. Revenues are greater than 100% due to intersegment revenue.

While nearly half of Samsung’s revenue comes from the mobile segment, it accounts for just under a quarter of Samsung’s operating profit. The numbers are effectively reversed for Samsung’s semiconductor business. Not only that, but the semiconductor industry is currently in the midst of a nasty slowdown. Thus, the above results could be greatly underestimate importance of memory chips to Samsung’s overall fortunes.

For example, in the second quarter of 2018, just over a year ago, semiconductor prices were skyrocketing and the semiconductor segment actually accounted for 78% of Samsung’s operating profit. Not only that, but its operating profit was more than double that of last quarter, at 14.9 trillion won, compared to 6.6 trillion won last quarter.

As a result, Samsung’s earnings are much more tied to the extremely cyclical DRAM and NAND flash memory markets, which are subject to ups and downs, than to smartphones. This usually causes Samsung to earn a lower valuation multiple than Apple. While Apple’s hardware, particularly the iPhone, is subject to its own cycles, they’re not as severe as Samsung’s semiconductor business.

Valuation comparisons

Although both stocks are trading below average market multiples due to their dependence on hardware, which Wall Street values ​​less than software, Samsung is clearly cheaper than Apple. However, both companies have excellent balance sheets and also pay good dividends to investors.

Metric Apple Samsung
P/E ratio* 19.0 10.7
Dividend yield 1.41% 2.93%
Net cash $102 billion $70 billion
Net cash as a percentage of market capitalization ten% 26%

Data source: Yahoo! finance, Apple and Samsung quarterly filings. * TTM = last 12 months.

Apple’s valuation may also benefit from being a bit more shareholder-friendly than Samsung. For example, Apple has been very aggressive in buy back own shares, while Samsung repurchased only a tiny fraction of shares in 2018, a “boom” year for semiconductors, and repurchased no shares in 2019. This may be due to the family’s majority ownership Lee. In addition to hoarding cash at the corporate level, the Lees have also added enormous complexity to Samsung’s ownership structure, thanks to the complicated circular ownership of Samsung’s many separate (but controlled) subsidiaries.

Meanwhile, Apple has been the epitome of shareholder friendliness, returning $50 billion to shareholders through buyouts, or about 5% of current market capitalization, in the past nine months alone. Apple also plans to return even more, with the clear and stated goal of becoming cash neutral (cash equals debt) over time. The capital allocation policies have been praised by none other than warren buffetwhich made Apple its biggest public participation.

Samsung is for high reward, Apple for lower risk

I think both companies are great stocks right now, but investors with a lower risk tolerance should probably go with Apple. The company’s results are less volatile and its corporate governance is much better.

Moreover, it is also somewhat difficult to trade Samsung shares. There are no Global Certificates of Deposit (GDRs) approved on US exchanges – Samsung GDRs are only listed on the London Stock Exchange (LSE), although many US brokers have access to the LSE. You can also trade Samsung directly on the Korea Stock Exchange, KRX, but to do so you may need to open an account with a specific Korean broker or affiliated bank.

However, assuming you’re prepared to endure the business headaches and cyclicality of Samsung’s business, its stock looks like compelling value right now. But so is Apple, and owning Apple is a much more stress-free experience.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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