Better Buy: Apple Inc. vs. Samsung

Apple (NASDAQ:AAPL) and Samsung (NASDAQOTH:SSNLF) dominate the global smartphone market. Samsung is the leader in terms of number of phones sold, while Apple commands the lion’s share of the industry’s profits. And their leading positions in this $500 billion market have allowed them to deliver handsome gains to investors over the years.

But which of these tech titans is the best buy today? Let’s find out.

Image source: Getty Images.

Competitive advantage

Samsung controls about 20% of the global smartphone market, in terms of units shipped, and about a quarter of the industry’s profits. Yet Samsung is facing intensifying competition from lower-priced Chinese rivals in many of its core markets, with even its flagship devices recently experiencing sluggish sales.

Apple sales, on the other hand, have been more resistant to this threat. Apple competes primarily at the premium end of the market, and Chinese smartphone makers have so far failed to gain much traction in Apple’s core U.S. market. Moreover, Apple’s vibrant ecosystem and growing suite of services — including Apple Pay, Apple Music, iTunes, iCloud, and the App Store — all help to lock in users. In fact, a 2017 Morgan Stanley survey found that 92% of iPhone users were “somewhat or extremely likely” to upgrade to a new Apple device within the next year. By comparison, only 77% of Samsung users said they planned to upgrade to a new Samsung phone.

This fierce brand loyalty also gives Apple pricing power, or the ability to charge higher prices without severely crimping sales. In turn, Apple typically earns more than 70% of the smartphone industry’s profits, even as its phones account for only about 15% of units sold.

I should note that Samsung supplies some of the chips and displays used in Apple’s phones, so Samsung does profit from Apple’s success. Apple is, however, rumored to be considering switching suppliers for some of the parts in its new iPhone models, no doubt to reduce its reliance on its primary smartphone competitor.

All told, when it comes to the smartphone wars, I’d argue that Apple is in the strongest position to win over the long term.

Advantage: Apple

Financial fortitude

Let’s now take a look at some key metrics to see how Apple and Samsung stack up in regard to financial strength.

Metric

Apple

Samsung

Revenue

$247.42 billion

$222.91 billion

Operating income

$66.06 billion

$52.77 billion

Net income

$53.32 billion

$40.61 billion

Operating cash flow

$67.22 billion

$60.00 billion

Free cash flow

$53.73 billion

$20.03 billion

Cash and investments

$267.23 billion

$73.29 billion

Debt

$121.84 billion

$11.49 billion

DATA SOURCES: MORNINGSTAR, YAHOO! FINANCE.

Apple and Samsung are colossal enterprises. With nearly half a trillion in revenue and almost $100 billion in profits between them, calling these tech titans powerhouse businesses is an understatement. Yet Apple separates itself from Samsung in two areas. The first is its free cash flow; thanks to its significantly lower capital expenditure requirements, Apple generated $30 billion more in free cash flow during the past year. The second is its incredible balance sheet strength; Apple has $80 billion more in net cash in its coffers than Samsung. For these reasons, the edge goes to Apple when it comes to financial fortitude.

Advantage: Apple

Growth 

Apple is expected to increase its revenue by nearly 14% in 2018, thanks to strong sales of the iPhone X. Samsung, meanwhile, is projected to grow its revenue by less than 6% this year, due in part to “stagnant sales” of its flagship phones.

As for earnings per share, analysts are forecasting that Apple will increase its EPS at about 13.5% annually over the next half-decade, boosted by the growth of its services business and massive share buybacks. Samsung is predicted to grow its earnings at about 10.4% per year during this time, driven largely by its display panel and memory chip businesses.

As such, Apple has the edge in terms of expected growth.

Advantage: Apple

Valuation

Lastly, let’s check out some key value metrics for Apple and Samsung, including the price-to-sales, price-to-free cash flow, price-to-earnings, and price-to-earnings-to-growth ratios.

Metric

Apple

Samsung

P/S

3.72

1.21

P/FCF

17.12

13.04

Trailing P/E

18.10

6.86

Forward P/E

14.12

6.15

PEG

1.20

0.62

DATA SOURCES: YAHOO! FINANCE.

On all five metrics, Samsung’s shares are far less expensive than Apple’s. This is to be expected, considering Apple’s stronger financial position and higher expected growth rates. Still, it’s clear that Samsung’s shares are more attractively priced.

Advantage: Samsung

The better buy is…

Samsung’s stock may be cheaper, but Apple’s stronger competitive advantages, superior financial strength, and healthier growth prospects make it the better buy today.

Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.