The scandal around Galaxy Note 7 devices resulted in a complete production halt and a disaster for Samsung's reputation. Yet for Apple, this could be a chance to eat into Samsung's vast market share and sell up to 8 million additional devices.
As of yesterday, Samsung Electronics (OTC: SSNLF) has decided to entirely discontinue the production of its newest Galaxy Note 7 model. After being involved in a two-month nightmare where their phones were exploding in the hands of the customers, Samsung has made a final decision. Over the last two months, Samsung has received almost a hundred user complaints on self-inflaming phones that caused burns, property damages and even car fires, what forced the company to carry out a costly recall campaign around the globe. However, Samsung's bad luck didn't stop there: the new phones delivered to the customers as a replacement for the devices with faulty batteries were showing the same "fiery" behaviour.
Samsung's decision to permanently halt the sales of the model could result in the "lost" sales of about 19 million devices, say Reuters experts. In revenue terms, this could mean losses of nearly $17 billion as well as an irreparable brand damage to the Note 7 line. Some experts add that the "worst-ever" recall could also affect the performance of other Samsung models as the scandal got out of hands.
"They need to be writing to every customer with an apology and some form of 'compensation'. It will clearly be costly for the company but the alternative is to end up going the way of Nokia and Blackberry," an analyst Stephen Robb told Reuters.
On yesterday's news, Samsung's shares have seen the biggest one-day drop in 8 years, plummeting over 8%. The new prognosis of $17 billion in sales losses is much bigger than the initial analysts' prediction of about $5 billion in losses over the recalled devices. The future of the Galaxy Note 8 device that was planned to be released next year is also unclear.
But, in the situation of the "worst-ever" recall for Samsung, there is also a winner: Apple (NASDAQ: AAPL). The company, whose iPhone 7/7 Plus models have been beating the predicted sales targets in many countries, is the one to benefit from Samsung's fiasco. And the benefits could be quite big. According to Brian White, an analyst working for Drexel Hamilton, Apple could sell up to 8 million additional iPhone devices before the end of this calendar year and gain a strong momentum in the Asian markets thanks to Samsung's weak moment.
"With original market expectations for approximately 10-14 million Galaxy Note 7 units in H2:2016, we believe Apple has an opportunity to pick up at least 8 million incremental units in CY:16. Moreover, this fiasco could permanently damage the Samsung brand in the smartphone market, a big opportunity for Apple to gain market share," White wrote.
The analyst believe that the "doom and gloom" around Apple is starting to subside due to the strong start of the newest iPhone 7 and 7 Plus sales around the globe, including such challenging market as China.
"During our visit to over 30 smartphone stores and electronic retailers in Shenzhen this week, we could feel the momentum of Apple's iPhone franchise and the struggles at some of its important competitors in China. The iPhone 7 Plus is clearly favored over the iPhone 7 in China, while the two new black colors were the most popular. Moreover, today's meetings with two leading China-based telecom carriers highlighted better demand for the iPhone 7/7 Plus launch compared to the iPhone 6s/6s Plus," he added.
On top of that, the analyst upgraded Apple's price target to $185, from the current level of $110s and called the company the "top pick" for the second half of 2016. However, White has not always been so fond of Apple, as in the past quarters the analyst described the company's performance as "doom and gloom". But the so-far successful launch of the iPhone 7 models could be enough to bring Apple back to growth this year as well as the full fiscal year of 2017, he says.
If Apple manages to eat into Samsung's market share, the consequences are likely to be long-lasting, say Credit Suisse analysts. The main threat for Samsung is the "independence" of Apple's iOS system that has the highest loyalty rate in the industry, about 95%.
On the news of the Note 7 production halt, Apple stock jumped 2.3%, reaching its highest level in the last 10 months. As of writing, AAPL trades at $116.86.