Worries that after years of strong sales, the smartphone market may be saturated are weighing down cellphone makers like Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) and HTC Corp (TPE:2498), both of which released discouraging numbers on Friday.
Despite registering a 47 per cent jump in profit and selling a large number of Galaxy S4 smartphones —10 million in the month of May — Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) saw its stock fall after the South Korean company warned it won’t be able to grow sales as quickly as it has in the past. Samsung shares are down 16.75 percent this year.
HTC Corp (TPE:2498), which makes the popular HTC One smartphone, reported its sales for June were down 26 percent from a year ago, citing increased competition. The Taiwanese company’s stock is down 32 percent this year on the Taiwan Stock Exchange.
New Challengers in Emerging Markets
“Apple Inc. (NASDAQ:AAPL) and Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) have been dominating the high-end of the market and that’s the part of the market that is getting saturated,” Francisco Jeronimo, a research director for IDC, told CNBC.
Meanwhile, emerging market sales are increasingly dominated by lower-cost phones from China’s Huawei and ZTE Corporation (SHE:000063), as consumers in those markets cannot afford phones costing hundreds of dollars.
Samsung is ramping up its low-end smartphone business in order to increase its foothold in emerging markets, to which analysts attribute its narrowing margins.
Marginal Annual Improvements
Companies and analysts are increasingly concerned that sales of high-end smartphones can no longer grow at the rate they have over the past few years.
It has become harder to impress buyers with new features in upgraded models as most smartphones offer similar functions. Fewer “wow” factors in new smartphones mean people will not upgrade as quickly as they did when the devices were still a novelty, forcing device makers to spend more on splashy advertising and marketing.
With year-to-year improvements seen as marginal, it can be difficult to convince consumers to break a contract early or switch from a phone they’re comfortable with.
The key here is momentum. Smartphones aren’t cheap and represent a considerable investment by the average user. It appears that both Samsung and HTC Corp (TPE:2498) are struggling to maintain momentum in markets that are largely saturated by this point and the key now is the willingness of consumers to replace their devices more frequently.
In a slower growth market, the initiative may swing back in “Apple Inc. (NASDAQ:AAPL)’s favor as the Californian tech player prefers to bring out fewer models of expensive devices that deliver more profit in the long run as opposed to churning out large volumes and varieties of low-margin devices typical of the Android ecosystem.
Smartphone Makers Impacted
All five major smartphone makers — Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930), “Apple Inc. (NASDAQ:AAPL), HTC Corp (TPE:2498), BlackBerry and Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) — have seen their stocks drop this year, while the S&P 500, a broad index of U.S. companies, is up by nearly 14 per cent.
BlackBerry’s stock has dropped 19.5 per cent on the Nasdaq, as sales of its new BlackBerry Z10 and Q10 failed to meet expectations. It also expects more losses in the future.
“Apple Inc. (NASDAQ:AAPL), long seen as the leader of the smartphone market, has cut the number of iPhones it intends to make this year from 40 million to 25 million, according to Jefferies & Co analyst Peter Misek.
Several brokerages have downgraded Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) and their earnings forecasts for the company on fears that the S4 is not selling as strongly as hoped.