10/30/16

BayStreet: 70% of Galaxy Note 7 owners will stick with Samsung

Although Samsung suffered a very public black eye due to its ongoing Galaxy Note 7 recall, at least one research firm believes the company likely won’t experience any major customer exodus.

“We believe the vast majority (70%) will remain with Samsung and likely choose a Galaxy S7 device alternative,” BayStreet wrote in a recent note. “The second, and more difficult variable, is what percentage of switchers are willing to leave the Android ecosystem. Note customers are aspirational and value premium brands, and thus the iPhone could certainly appeal to them. However, Note customers are also among Samsung's most loyal.”

Added BayStreet: “Our base case assumes roughly half of switchers (or 15% of total) will choose an iOS device, which equates to only a 200-300k increase to 4Q16 iPhone sales.”

BayStreet issued its guidance shortly after Samsung stopped producing the Galaxy Note 7 earlier this month. The company initially recalled the phone roughly two months ago, acknowledging “a battery cell issue” with the high-end handset that resulted in dozens of unspecified problems globally. Samsung recalled 2.5 million phones, but the overheating problems continued with some replacement phones that had been deemed safe, forcing the vendor to kill production entirely.

RELATED: Samsung using hazardous materials permit to transport Galaxy Note 7 returns

As a result of the debacle, Samsung slashed its pre-earnings guidance for the third quarter by $2.3 billion. The South Korean electronics behemoth said profit is now projected to be $4.63 billion, down from a previous estimate of roughly $7 billion.

Although the issue clearly represents a setback for Samsung, BayStreet argued that a significant portion of the company’s customers are loyal enough that they would return.

BayStreet isn’t alone in tempering its long-term view of the South Korean vendor. “Samsung is financially strong, with $70 billion in cash reserves. In our view, the near-term financial pain will be worth bearing if swift action to abandon the product helps safeguard Samsung's long-term reputation,” wrote analyst firm CCS Insight in a recent note. “We believe the widespread frenzy in the media overdramatizes the long-term implications for Samsung. History has shown that companies that act quickly to address technology problems are able to recover.”

CCS pointed to device recalls by Nokia (in 2007) and Dell (in 2006), also for faulty batteries, that the companies eventually recovered from.

“In terms of lost sales, a very generous estimate is that Samsung would have sold 10 million Note 7 units in the fourth quarter of 2016,” CCS wrote. “This is a fraction of the 80 to 90 million phones we estimate it will ship in total and we believe some potential Note 7 sales will be substituted by the Galaxy S7 and S7 edge.”

Indeed, Samsung is already offering $100 in credit to Galaxy Note 7 owners who trade in their recalled devices for another of the company’s phones.

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