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Is Samsung Still a Growth Company?

NEW YORK (TheStreet) -- Samsung Electronics' (SSNLF) forecast on Tuesday highlights the company's growing need for a new standout product in what is becoming a saturated smartphone market.

South Korea's largest company by market capitalization said it is on track to post a lower profit for the second straight quarter, mainly because of contracting margins in its smartphone business, which is under pressure from Apple (AAPL) and cheaper Chinese rivals.

Samsung is releasing the fifth version of its flagship Galaxy S smartphone worldwide on Friday. The phone has already been released in South Korea with a weak showing as critics say the product lacks flashy new features and fails to differentiate itself with existing Samsung Galaxy models.

Meanwhile, both Apple and Samsung are facing issues with the costs of their phones. Both companies have tailored their products to high-end consumers, pricing themselves out of range of poorer consumers in emerging markets and opening the door for smaller Chinese smartphone makers to capture market share.

China's Huawei Technologies has flooded emerging markets with low-priced smartphones. Last week, it reported 34% profit growth for 2013 as it became the world's third-biggest smartphone maker and said that it is aiming to double its revenue over the next five years.

Samsung now braces for what could be its first annual profit decline in three years, leading investors to question if the company's stellar growth will ever return.

The company's stock is down almost 12% from its record high hit in January last year, which has put pressure on the company to use its cash holdings to improve the share price.

Samsung plans to raise its dividend payouts, and with $52 billion in cash, the company has room to make more moves such as share buybacks. Some observers, however, say that Samsung's move to artificially increase its share price is acknowledging that the company's best days are behind it.

A technology company's most important goal is growth. Higher dividends compensate investors for a lack of growth. Therefore, Samsung may invest more to improve its products rather than concede market share in the increasingly competitive smartphone market.
 

SSNLF Chart
SSNLF data by YCharts

At the time of publication, the author had no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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