Consumer electronics giants Apple and Samsung have stolen the tech-sector headlines as the two behemoths have been waging a multi-billion dollar war over patents. Apple is demanding that Samsung pay up $2.5 billion for allegedly stealing the design technology for its smartphones at tables from the iPad and iPhone; on the other hand, Samsung is pointing the finger at Apple and demanding $399 million for stealing its technology. Scott Freeze, President of Street One Financial, recently took time out of his schedule to discuss the implications of this patent trial and how the looming verdict may impact ETFs which maintain signficant exposure to these companies.
Scott Freeze (SF): Apple has been suing Samsung all over the globe. The issue in this case is – did Samsung steal the design technology of the iPad and iPhone. That seems like a pretty hard sell to me, especially since all smartphones and tablets are incredibly similar in look and feel. It seems that the Samsung products are better received than the Apple products now in certain segments, and Apple needs to find a way to stop Samsung from taking more market share to maintain its dominance.
ETFdb: Do you foresee volatile trading in either of these companies as the jury deliberates over the next few days, and possibly weeks?
SF: I would expect both stocks to trade in-line with the broad market.
ETFdb: Which company do you think will suffer more if the verdict doesn’t swing their way and why?
SF: I think the downside is much higher for Apple than Samsung. While the dollar award is small if Apple needs to pay Samsung, the real risk to Apple is that Samsung continues to grow their market share and bring out more competitors to the iPhone and iPad. Apple grew on the stregnth of innovation and being the first ones with revolutionary products; however, they recently haven’t released new products, just slightly improved versions of existing ones, while Samsung has released competing products that by many accounts are superior to the Apple products. If Apple loses this verdict, then Samsung can move full force on distributing their “better and less expensive products”.
ETFdb: Should investors be wary of entering into ETFs heavy in Apple/Samsung prior to the verdict? Why or why not?
SF: I would hesitate to jump into QQQ, XLK, IYW (ETFs where Apple is 20% of the underlying basket) just because of the downside risk to Apple and the heavily over-weighted nature of the stock in those ETFs. Funds like EWY, AAIT, AIA where Samsung is the largest holding probably won’t see as much of a downward move should Apple win, since Samsung has tremendous upside prospects and will likely appeal any loss verdict. Conversely, an Apple win is only a slightly market moving event, while a Samsung victory could push their stock up 3-4% [see our Free ETF Stock Exposure Tool].
ETFdb: Do you think the implications from this case could have a major impact on the long-term fundamentals for Apple or Samsung?
SF: The long-term fundamentals for both companies really aren’t impacted by this case. It is more of a current market share issue, and win or lose, we feel that Samsung will continue to grow while we worry about Apple’s future prospects due to increased competetion and a lack of new products.
ETFdb: Aside from this uncertainty in the technology sector, what are you seeing in the markets now? How are you positioning your clients generally over the next 12 to 18 months?
SF: We think the markets are overpriced currently; the run-up this summer on no volume has been on the back of QE3 hopes, and we don’t see that happening. 12-18 months is a lifetime in this market. We wholly expect that the EU issues will grow and that Spain will need a bailout and Greece will leave the EU in the next 18 months. There is really no positive result to U.S. fiscal policy no matter what happens, and we expect volatility to spike. As Europe enters a second recession and the U.S. barely stays out of one, we see continued positive earnings on decreased estimates and misses on revenue, with a market that falls 10-18% and then trades flat; as such, I prefer ETFs to single stocks throughout this time frame.
Bottom Line: the Apple-Samsung patent battle likely won’t alter the longer-term fundamentals for each company, although the immediate reaction to a definitive verdict could provide attractive ETF trading opportunities for seasoned veterans.
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Disclosure: No positions at time of writing.