Apple (AAPL, Financial) still earns the bulk of its revenues from iPhone sales. In 2016, sales of iPhone brought in $136.7 billion, accounting for 63.4% of its total revenue for the year.
The problem for Apple is, after several years of strong double-digit growth, sales from iPhones declined by 12% this year. Not just Apple, but the entire smartphone industry enjoyed a period of strong sustained growth between 2009 and 2015.
Such fast-paced growth has pushed as many smartphones as possible into people’s hands. In the U.S., smartphone penetration is already well above 60% of the entire population; when you factor out the population of minors and older adults, the penetration level is much higher. This high penetration level will inevitably lead to a sales slowdown in highly profitable developed markets.
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As a result, most of the growth in future smartphone sales is going to come from developing nations where Internet penetration is relatively low with plenty of scope for expansion. Unfortunately, these are countries where the market for a high-end premium smartphone is much smaller when compared to low-end smartphones. This was the reason why Apple launched its lower-cost iPhone SE to expand its potential reach in those nations.
Margins, obviously, will be much smaller, and Apple’s strategy has never been to keep pricing products lower and lower just to keep top-line sales numbers moving because it is simply not as profitable.
With the global smartphone market expected to grow in the single digits and with most of the growth expected to come from emerging markets, Apple’s days of double-digit sales growth may well be over. In other words, it is likely we have already seen peak iPhone sales. Over time, things may improve for Apple as the smaller players and startups find it impossible to eke out a profit and eventually drop off along the way or consolidate with bigger players. It’s already happening in China.
As a premium player, Apple has some measure of insulation from the general smartphone market woes, but 2016 was the first time it actually felt a hard impact on its iPhone numbers. With Apple, any bad news is usually covered over by anticipation and rumors of “the next iPhone,” and that adds some tangible value to Apple’s public relations efforts as well.
All things considered, Apple’s stayability is extremely high in the smartphone race, and the company hogs up more than 90% of the profitability in the industry. As the industry consolidates over the next decade, Apple should be able to capture a little more smartphone market share, but double-digit growth is definitely going to be hard to come by.
As the average buyer’s upgrade cycle gets longer, smartphone makers are finding themselves in an odd predicament. Their sales will increasingly depend on their product refresh cycle, but that conflicts with the longer upgrade cycles of consumers. That’s not a good situation in which to be.
The market has already moved from its high-growth days to a more stable growth phase, and Apple must necessarily look at holding its ground in the smartphone market while aggressively beefing up its its services portfolio to bring strong growth back to the company.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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