On Friday, Apple Inc. (AAPL) suffered its second major setback of the week, as the U.S. District Court in San Jose, California, denied Apple an injunction bid to ban Samsung’s smartphones and tablets in the US. According to the ruling, the court granted Samsung the right to sell its products in the country until the case goes to trial next year.
This is the second jolt to Apple, coming close on the heels of the Australian Federal Court ruling. On November 29, the Australian court ruled in favor of Samsung Electronics, clearing its way to sell the Galaxy 10.1 tablets in the country after the temporary ban ends on Dec 9.
The companies have been at loggerheads since April, suing each other over 30 patents across four continents. Apple’s lawsuits are mainly targeted at design-related issues, while Samsung’s lawsuits primarily focus on technology patents.
While the bans provided iPads with opportunities to capture consumer mindshare, these setbacks will likely tax the company. The look and feel of the iPad is a competitive differentiator and with these differences receding, Samsung is going to find it easier to compete with Apple. Additionally, there is always the fear that other courts may rule along the same lines.
Both verdicts have come at an opportune time for Samsung, since holiday sales are currently in full swing. Apple intended to stop Samsung from claiming their share of gains and wanted to enjoy the seasonal sales all alone in the U.S., which also happens to be Apple’s primary market. However, it now appears that Apple’s dominance in these markets could be threatened, while Samsung makes hay.
Apple has also been trying to stall the growth of Google Inc’s (GOOG) Android OS. Samsung is leveraging on Android to become one of its most significant competitors and the company is already the largest vendor of Android-based products. The fact that Android is expected to continue its very strong growth all over the world is a major headache for Apple.
The latest report from Gartner suggests that Samsung became the top smartphone manufacturer worldwide as sales tripled year over year to reach 24 million in the third quarter of 2011. On the other hand, Apple shipped 17 million iPhones in the same period, a year-over-year increase of 21%, but down nearly 3 million units from the second quarter of 2011.
Additionally, in the third quarter of 2011, market share of Android OS had almost doubled from the year-ago quarter to 52.5%. Meanwhile, Apple’s iOS had a 15.0% share, which declined from the previous year (16.6% in 3Q10).
However, Apple is expected to bounce back in the fourth quarter, going by the strong pre-order numbers for iPhone4S that came in right in the first weekend after its announcement. Emerging markets such as Brazil, Mexico, Russia and China are becoming more important to Apple, representing 16% of overall sales.
Apple has been impressive with its robust Black Friday sales in the domestic market, but its smartphone and tablet markets are crowded with the likes of Research In Motion Ltd. (RIMM), Hewlett-Packard Co. (HPQ), Dell Inc. (DELL), Samsung, Cisco Systems Inc. (CSCO), Toshiba and Acer, which are gaining popularity in several international markets. Additionally, Amazon.com Inc. (AMZN) stepped into the intensely competitive tablet market with the launch of its first media tablet: “Kindle Fire”.
Some analysts expect the lower-priced Kindle Fire to gain traction in the tablet market for the varied services and content offerings. Others believe that the company may not gain ground versus Apple just yet, although it could get other tablet makers to review their pricing. However, so far, Apple has managed to maintain its leadership position in the tablet market and enjoys a very strong position in the smartphone market as well.
Nonetheless, the impending lawsuits in different countries will remain an overhang on the stock going forward.
We also believe that Apple’s ability to innovate and grow in developing nations, where the market is more cost-sensitive, will determine the company’s fortunes in future.
We maintain our Neutral rating over the long term (6-12 months). Currently, Apple has a Zacks #2 Rank, which implies a ‘Buy’ rating in the near term.
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