Apple has had an incredible run recently, but its valuation is now well above its hardware technology peers which means one of its biggest competitors could be a better investment right now.
Kathy Davey, investment manager for the Ashburton Global Leaders Equity Fund which invests in the world’s most prominent mega-cap companies like Alphabet, Visa and Microsoft, said that Apple is a very high-quality company with a positive outlook.
“But based on its current valuation - and the market’s expectation that the company will grow earnings by around 12% per annum on average over the next three years - we believe that there are other quality companies operating in the sector which offer investors better upside.”
One such stock is Samsung Electronics.
“Samsung is the world’s largest supplier of smartphones and growth will be supported by new innovations such as 5G and foldable phones which are expected to spur the next smartphone replacement cycle,” Davey said.
“Samsung’s 12-month forward price to earnings ratio of 12x is significantly lower than Apple’s which is 30x. However, the market is expecting Samsung to grow earnings at around 25% per annum on average over the next three years, roughly double the rate of Apple.
Additionally, around 60% of global smartphones have OLED (Organic light-emitting diode) displays and Samsung dominates this market with a 90% market share. This means Samsung benefits from growth in smartphone sales as a whole and not just under its own brand. Samsung is also the world’s largest supplier of semi-conductor memory, where growth over the medium-longer term will be supported by new technologies such as 5G, autonomous systems, artificial intelligence, 3D sensors, datacentres, cloud services and e-commerce.
“Samsung also has a very strong balance sheet, with net cash of around USD80 billion and this financial flexibility allows it to take advantage of attractive acquisitions in the technology sector, repurchase its shares and pay a healthy dividend which currently yields 2.6%.
“We believe the company’s quality attributes and attractive growth outlook are not fully reflected in its price. Even though Samsung is up 40% since its March lows, the company still offers investors an opportunity to buy a great company at a reasonable price,” Davey concluded.