Stock Talk: Those analysts, they be finicky folk

To close out last week's trading week, Samsung shares tanked, and everyone seemed to be talking about it. The short version: Samsung stock dropped 6 percent, which means $12 billion of market value was wiped out in a single day. In case you were wondering, Samsung has a market value just under $200 billion. By comparison, Apple is worth $410 billion, Google is worth $290 billion and Microsoft is almost $300 million. All of these market values make BlackBerry seem like a drop in the bucket given its market capitalization of $7 billion.

Why did Samsung drop? A few analysts downgraded the stock. The downgrades apparently were sparked by fears that Samsung is going after more market volume at lower margins. The evidence? A couple of stripped down models of the Galaxy S4 were announced.

I think Samsung is doing a tremendous job of profiting from the global Android explosion. As much as people think Google must be unhappy with Samsung's dominance, I dont think thats the case. Google must love how quickly Samsung has helped to propel Android to dominance. We are in a new world of mobile computing, and Android has become the mobile equivalent of Microsoft Windows in terms of market dominance. To be clear, Im not comparing the way Microsoft is run versus Google, or the quality of each companys software. Im speaking only about dominant market share.

Google wants its OS in as many peoples hands as possible because it inevitably generates revenue (advertising, app sales commissions, media sales, etc). Gartner data from Q1 2013 shows that Google has succeeded, with almost 75 percent market share of the smartphone market. Its also widely known that Samsung is the only player making any real money among Android vendors with their dominant share.

I remember looking at the PC market a few years ago. HP and Dell were the two major vendors and the market leader controlled about 20 percent of the unit volume. Of course in PC land people really didnt care too much about the look and feel of the hardware. The tower went under a desk, and the keyboards and monitors were all pretty much the same.

Compare this to the smartphone market, where Google (via Android) is the new Microsoft. People care about the look and feel of the hardware because they interact with the whole package. They hold the whole product in their hand. I think this provides mobile device vendors with a chance to build a more powerful brand, as Samsung has done. We also have to realize that each vendor tweaks Android to their liking, so there is some additional brand building capability in Android land versus the old world of PC land.

According to research from former Morgan Stanley analyst Mary Meeker, who is now a partner at VC firm KPCB, Samsung has gone from 4 percent smartphone share in 2010 to having 29 percent share in 2012. What a move!

Samsung is now in a position that no PC maker has ever been in. It's grown to enjoy boatloads more market share than any other competitor. Samsung controls much of its own supply chain, and it has superb brand value among Android users.

Can you blame Samsung for going after the mid range and low end of the market? I cant. I think it's making the right decisions. Nobody else stands a chance of earning a reasonable gross margin when competing against the volume that Samsung brings to the table. If Samsung plays its cards right (and I think it is doing so), it will own cell phone market just as Nokia owned it in the 1990s. Except that now the OS is pretty standardized, and Samsung gets to rely on Googles R&D and services for free.

The only other news that may have affected Samsung stock was the possibility of an Apple trade-in program. Does such a program from Apple hurt Samsung? I dont think it makes much of a difference to Apples competitors. I think most customers behave by selecting the platform they want to be on and then choosing a phone. People who have joined the Apple camp are most likely to stick with it just as people who invest in Android through a Samsung Galaxy S4 or whatever other device they choose.

The introduction of a trade-in program by Apple, if it is real, probably just improves the rate at which Apple customers will upgrade. Its a good way to get customers to spend more money than they otherwise might. Sure, it may keep some would-be Apple defectors away from Samsung. But I doubt this is a significant factor.

I encourage you all to remember that technology stocks are volatile. The market leader usually attracts a premium valuation. As a result, when there is any sense of potential danger, market values tumble. Sometimes the tumble is a precursor to a real collapse. Sometimes its just unwarranted and emotional. Samsung has only been riding on top for a couple of years. I think theyve got a lot more time to enjoy their spot and build a powerful moat around their business.

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