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Apple Wins Key Victory Over Samsung

Zacks Equity Research

Apple Inc.’s (AAPL) relentless effort to curb Samsung’s growth in the tablet market gathered steam when The U.S. Court of Appeals for the Federal Circuit ruled in favor of the iPad maker in a case related to patent infringements. This recent ruling may lead to a potential sales ban on the Galaxy Tab in the U.S., reported Bloomberg.

In December last year, Apple had appealed to the District Court in San Jose for banning Samsung’s Galaxy Tab in the U.S.  However, the plea was rejected that time. According to the ruling, the court granted Samsung the right to sell its products in the country until the case goes to trial.

Apple and Samsung have been fighting several legal battles spreading across 10 countries. Their legal tussle hinges on certain design-related patent issues, where the former claims that Samsung’s Galaxy Tabs look and feel just like an iPad.

In light of the recent development, Apple can pursue the sales ban on Samsung’s tablets until the case goes on trial. However, both the companies are expected to look for an out-of-court settlement later this month. Alternatively, Samsung has the option to modify its design for the tablet to dodge the ban.

By banning Samsung tablets in different countries, Apple’s main objective is 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.

We believe that Apple’s legal hassles will continue as competition heats up in the smartphone and tablet space. This will increase legal expenses and will hurt Apple’s operating profit going forward.

Despite the threat from Android and lower-than-expected sales in the tablet market, Apple has maintained its leading position in this arena with 68% market share in the first quarter 2012, which rose significantly from 55% in the fourth quarter of 2011, according to IDC. Samsung came in second while Amazon.com Inc. (AMZN) was third. Interestingly, there was a steep drop in Android-based tablets in the first quarter.

Apple’s iPad constitutes a significant portion of revenue in the recently concluded quarter. Total iPad units sold in the quarter were 11.80 million versus 4.69 million sold in the comparable prior-year quarter. Recognized revenues from iPad and accessories during the quarter jumped 132.0% year over year to $6.6 million, driven by strong demand for the new iPad.

We believe that Apple remains the biggest growth story based on its product pipeline, popular apps, iCloud and iPhone 4S, and the new iPad and Apple TV, and loyal customer base.  With a solid balance sheet and robust revenues, we expect Apple to outperform its peers in the long run. Moreover, we also expect Apple to succeed in developing countries due to the growing affluence of the middle class in key markets.

We maintain our Outperform recommendation 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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