The war to dominate the mobile smartphone market has largely been against two foes: Samsung (SSNLF) and Apple (AAPL). The latter has been winning, but the former has been catching up. Unfortunately for Samsung, the recent and protracted problems with Galaxy Note 7 models, which have been catching fire around the world, have hurt the company and its share price.
At the same time, AAPL has been benefitting. The stock is up 30% from its year-to-date low in May, and the fears that persisted throughout the year about falling iPhone sales seem to have evaporated in recent weeks.
The trend, which has been particularly acute since the Note 7 problems hit the presses, seems to be based on a fundamental assumption: Note 7’s problems will cause Samsung to lose marketshare and Apple will benefit. There are some underlying assumptions behind this thought process which are quite interesting.
For one, it assumes phone users are flexible about the ecosystem they use, and will quickly and readily migrate en masse to a new operating system. This is in direct contrast with the investment thesis behind Apple that caused it to gain so much in the late 2000’s and earlier this decade: namely, that the iOS ecosystem would be “sticky” and people would remain loyal to one particular operating system. This is in direct contradiction to the previous investment thesis on AAPL.
If you are changing your assumption about buying AAPL, you should explain why you are making this change. Additionally, if you are bullish on AAPL because of the Note 7 problems, you will also need to address two other issues.
For one, there is the lack of a microphone jack in the iPhone 7. Detractors in the tech industry said this was a bad decision, but the market has ignored this warning in recent weeks. Secondly, there is the emergence of the Google Pixel, which is Google’s second attempt after the Nexus to penetrate the smartphone market. It failed largely due to Samsung, whose Android-based phones outsold Google’s by a wide margin. If Samsung’s customers flee because of the Note 7, will they go to the Pixel instead of the iPhone?
No one knows, of course, but the market doesn’t seem to be considering this possibility. Which means analysts and investors need to look into it very closely.