NEW YORK (TheStreet) -- Last year, when everyone was clamoring for a so-called cheaper iPhone, Apple CEO Tim Cook said, "We're not in the junk business." This was the market Samsung flooded with cheaper alternatives to Apple's high-end devices.
According to data released by research firm IDC, Samsung has already shipped 85 million smartphone units in the first quarter. And when you consider that this is more than the combined total of Samsung's next four competitors, including Apple, it raises questions as to how much demand will there be for Apple's iPhone 6, rumored for release sometime in September.
Samsung's tactic has been clear. It wants to give customers two or three products from which to choose before Apple releases its new iteration. In many respects, this tactical move has worked to perfection. Not only was Samsung able to weaken Apple's margins, but the company also raised the profile of Google's (GOOG) Android operating system.
All told, Apple was being attacked in both hardware and software, which explains Apple's 40% decline from Apple's peak of $705 to below $400. But that's as far as the credit should go. None of this maneuvering has meant anything to Samsung's bottom line.Consider, Samsung just reported its first-quarter earnings results, which revealed its second consecutive quarter of declining year-over-year profits. Although the results were inline management's prior guidance, Samsung is now feeling the effects of high-end device saturation. Operating profit came in at $8.2 billion, reflecting a 3.3% year-over-year decline. Likewise, in the January quarter, although Samsung did post an impressive profit of $8.24 billion and a 1.5% year-over-year rise in revenue, there was still a 2.5% decline in mobile revenue. By contrast, in Apple's comparable quarter, not only did revenue increase 5% year-over-year, net income climbed 7%. And this was due to an 17% surge in iPhone unit sales. And despite a $40 sequential decline in average selling prices, this had little impact on Apple's gross margins. Management figured out ways to adjust the mix to achieve profitability goals. More than anything, Apple's strong margins has spurred the recent run-up in its stock. Samsung's management, meanwhile, is hopeful that the company's Galaxy S5 will help drive better second-quarter results. From the looks of it, that's a worthwhile bet. Even though it has been less than two months since the S5 hit the market, industry observers are salivating at the sheer volume that Samsung has already shipped. That goes back to what I've said above. The volume has meant very little to Samsung's bottom line. This is an an industry where it is impossible to maintain high margins for a sustained length of time. Whether it's computers, TVs, music player or video game consoles, no one has been able to maintain high levels of profitability. The fact that Apple still has margins hovering around 37% is a testament to the quality of the company's products and management's ability to market to those who can see the value in those products. This is also why Apple does not have to enter the junk business or care about market share. Apple is the only one making any money and putting points on the scoreboard. With all of the courtroom drama that has taken place between the two companies, this hated rivalry is not going to end anytime soon. As one who values competition of the free market, I hope it never ends. But when evaluation the company's from an investment perspective, it's not a close race. It never has been.
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>>READ MORE: Piercing the Could of Doubt on Global Warming At the time of publication, the author was long AAPL and held no position in any of the stocks mentioned. Follow @Richard_WSPB
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