- The smartphone revolution began with iPhone, and it looks like it will end there.
- Developed markets are now showing stable and slow growth in the smartphone segment.
- Until Apple boosts its Services revenues, AAPL stock will remain under pressure.
Apple Inc. (NASDAQ:AAPL), the world’s largest company in terms of market capitalization and one that many of us expected or hoped will hit a trillion-dollar market cap at some point, has seen its stock price move sideways since peaking around $132 in the middle of 2015. Apple’s market cap is now at $594 billion after gaining 4.5% since the start of the year.
One of the primary reasons for the sideways movement is the slowdown in iPhone sales. It is not that Apple suddenly started making such bad products that people started shunning them, but it is more of a systemic problem where the smartphone revolution, kick-started by none other than Apple, has reached a critical point in its life. (See also: Has Trump Fear Dragged Apple Inc. (AAPL) Stock Into Buy Territory?)
When you look at 2016 and compare it with 2006, that phenomenon is obvious. How many people do you know, who still carry a feature phone in their hands? Not many, I guess. That’s the effect that Steve Jobs’ vision has had on the way we interact with our mobile devices. Obviously, Apple is not the first company to think of creating a smart device, but none have been able to romanticize it and give it the status of desirability that Apple has.
The Story of the Smartphone in Developed Markets
Smartphone sales have been on fire for the last ten years since the launch of the original iPhone, but it is not something that can go on forever. If we take a single developed market as an example, we can clearly see the way the segment has matured over time.
The total U.S. population stands a tad above 320 million, and there are already more than 207 million people using smartphones. When you account for citizens below the age of 15 (roughly 20%) and above the age of 70 (another 10% - data from Age and Sex Composition in the United States: 2012), we have a potential market size of ~224 million.
Though current forecasts predict an addition of another 60 million smartphone users in the country by 2021, it will be a huge surprise if we get to that level. But what is clear is that the growth from 60 million in 2010 to 207 million this year took five to six year to achieve. On the flip side, there is no way to repeat that feat, and it’s simply because there are already smartphones in as many hands as possible. The only thing that can offset that now is population growth, and even that is only happening at less than 1% every year since 2001.
This case will repeat itself in all developed markets and countries where internet penetration is at high levels. As such, the smartphone industry has moved on from being a growth story into a stable story. The market is already at a mature stage where product refresh and stealing customers from your competitors is the only way to keep things moving up.
Being a luxury segment player, Apple sits at the top end of the industry with much smaller market size, making things even more difficult for Apple to keep the needle moving. One advantage of that positioning is that it will be difficult for its competitors to steal customers away from Apple, as they will have to compete with a company that has made its name by making products that are better than other comparable products. It will be an expensive task to steal customers from Apple. (See also: Why Apple Inc. (AAPL) Stock Is A Strong Buy Now)
Gartner has predicted that smartphone sales growth will now be in single digits and, considering the state of developed markets, it is easy to say that most of that growth is going to come from emerging countries where Apple’s product positioning will make their potential market size an even smaller one.
Apple will be able to hold its ground on iPhone sales, but growth might ebb and flow depending on market conditions. A lot will depend on how their lower-margin iPhone SE, the cheapest iPhone, does in developing countries. The biggest problem for Apple right now is that more than 60% of its revenues come from iPhone sales.
iPhone SE didn’t break any sales records this past quarter, but If it can provide some measure of support, it will give enough time for Apple to build its services portfolio and generate a strong alternative revenue stream. Until that happens Apple stock price will remain under pressure.
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