By Beth Kindig
Since its launch almost 13 years ago, Apple’s iPhone has captured 87% of smartphone profits despite selling only 18% of smartphone units. Today there’s clear evidence that mobile is plateauing, threatening those sky-high earnings.
Investors should pay attention to those signs, as analysts raise their price targets on the company’s stock /zigman2/quotes/202934861/composite AAPL +0.26% by playing up services, including a new TV-streaming service that is being introduced very late in the game.
The smartphone market contracted to 1.462 billion units in 2017 and to 1.420 billion units last year. While almost 1.5 billion smartphones sales a year globally is substantial, the law of saturation drives down prices. I wrote about the price effects of mobile saturation in March, prior to Apple lowering prices for the first time with the iPhone 11.
IDC, a telecommunications-research firm, updated its numbers last month to reflect an anticipated decline of 2.2% to 1.37 billion units in 2019. The company is forecasting a mere 1.1% compound annual growth rate (CAGR) over the next five years through 2023.
China represents about one-third of smartphone penetration compared with the U.S., at one-12th. Pricing wars are evident in Asia, where China’s Huawei has grabbed market share to become the world’s fastest-growing smartphone seller. The company has seen a 66-fold increase from 3 million units sold in 2010.
Recent data show that native Chinese companies like Oppo and Xiaomi are nipping at Apple in third place. This has resulted in a price war because Chinese phones often have better features. Last year Apple had to reduce iPhone prices in China as a result of weak purchases by the Chinese.
Samsung /zigman2/quotes/202367843/delayed SSNLF +30.66% may be the true bellwether for mobile, as the company is in first position for total smartphones shipped and is the world’s largest manufacturer of memory chips. In the first quarter, the company reported a 60% drop in operating profits, followed by a 56% decline in the second quarter. Analysts expect another decrease in the third quarter. Smartphone units have been making lower highs and lower lows over the past two years.
Samsung’s disappointing performance hints at the ties between smartphone sales and consumer confidence as China’s confidence index is languishing at a two-year low.
Notably, IDC forecasts the pricing wars will continue with 5G handsets in Asia, as low-cost models are expected to hit the market next year. In the U.S., Latin America and Japan, the average selling price (ASP) of a 5G handset will be around $1,000, while it will be $600 in China.
The big picture
In the excitement of Apple’s new TV+ streaming service and other services revenue, which accounts for one-fifth of Apple’s total revenue, the market has overlooked the big picture of overall revenue decline. Instead analysts are predicting a perfectly synchronistic hand-off .