Leading research firm Gartner has predicted worldwide device sales will stagnate until 2019. The company added that mobile phone shipments are only growing in Asian and Pacific markets, while the PC market decline is expected to continue in 2017. This will be a huge blow for device manufacturers around the world, especially for Apple (AAPL, Financial), which is expecting to turn things around on the smartphone front.
2016 was the first year Apple reported an annual profit decline in the last 15 years. From the time the first iPhone launched 10 years ago, Apple’s sales numbers have grown from $24.01 billion to $233.72 billion in 2015. The rapid growth of Apple’s revenue was fueled by iPhone sales, and the company is still dependent on iPhone sales for a major portion of its revenue.
During 2016, Apple’s annual sales declined to $215.639 billion, with the iPhone bringing in $136.7 billion, accounting for nearly 63.4% of their revenue. Naturally, the state of the smartphone market around the world is extremely important to Apple since it will have a direct impact on Apple’s top and bottom lines.
Source: 1reddrop.com
The penetration problem
Smartphone penetration in developed markets such as United States is already above the 70% level. There is very little room for a luxury smartphone maker to sell more smartphones because most of the potential market is already reached. As Gartner says, there is opportunity in the APAC region but, once again, the luxury segment’s market size is much smaller in those regions compared to developed markets.
If sales do stagnate, all the players will be working double time to steal customers from each other and will entirely depend on product refreshes and buyer upgrade cycles to move the sales needle. Unfortunately, buyer upgrade cycles are getting longer, adding more pressure on manufacturers.
“While something like a 24-month to 26-month upgrade cycle used to be the norm, users appear to be keeping their phones significantly beyond that two-year mark. As 2015 ended, 28-month cycles were the most popular and estimates suggest that’s only lengthening for early 2016, with users now waiting an average of 29 months between new phones.” - Pocketnow
The short to medium-term future of Apple’s sales look a little weak, which might exert a downward pressure on Apple stock moving forward. Apple will, of course, increasingly look towards avenues outside the devices segment, such as services like Apple Pay and Apple Music, but neither of these verticals are mature enough yet to offset the phenomenal sales numbers the iPhone has been delivering year after year for the past decade.
On the services front, Apple posted 22% growth for 2016 - not extraordinary, but at $24.348 billion it is a significant growth engine for the future.
Unless Apple is able to post some big numbers around device sales during the earnings call at the end of this month, it could see a dip in stock price, giving investors the windows they need to increase their positions.
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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