Will all the negative hype surrounding Apple Inc. (NASDAQ:AAPL) right now, the company’s stock is on track to end the year in the red. Investors who purchased shares this year are just barely hanging on to their gains, and some have lost money on the Wall Street darling. However, any weakness in iPhone sales may not be Apple’s fault at all but rather a broader trend in the smartphone industry as the lower end of the market is growing faster than the high end premium end of the market.
Despite this trend, a new report on the state of the wireless industry indicates that the company still makes up the lion’s share of smartphone profits. Together, Apple and Samsung still hold half of the smartphone industry’s profits – an interesting observation in light of both companies’ struggles to move their smartphones. Apple Inc. (NASDAQ:AAPL) grabs a massive 84% of operating profits.
Yost Partners was up 0.8% for the first quarter, while the Yost Focused Long Funds lost 5% net. The firm's benchmark, the MSCI World Index, declined by 5.2%. The funds' returns outperformed their benchmark due to their tilt toward value, high exposures to energy and financials and a bias toward quality. In his first-quarter letter Read More
Apple also dominates in smartphone revenue, with Samsung in second place
Credit Suisse analysts issued the extensive report on the wireless industry, in which they said that Apple’s and Samsung’s share of the market’s profits has been climbing steadily over the years, climbing from only about 15% in 2007 when the first iPhone came out.
Interestingly, the one-year product cycle most analysts give to smartphones appears to be too long. The Credit Suisse team found that the cycles actually last only about six months on average.
While Apple Inc. (NASDAQ:AAPL) continues to grab by far the largest chunk of smartphone profits, its unit share is actually shrinking. The Credit Suisse team expects Apple’s unit share to decline to 14% in 2016 with 214 million units. In the near term, they expect volumes to remain weak, as demonstrated from multiple data points within Apple’s supply chain which suggest that sales may be somewhat lackluster. However, the analysts also see Apple as being the best positioned because of its ecosystem control, consumer loyalty and premium brand.
Samsung leads in units, but its share is declining as well. Both companies’ declining unit share can be attributed to the growth at the low end of the smartphone market as developed markets show increasing signs of saturation and emerging markets become the new battlegrounds for smartphone vendors. As a result of these trends, low end Chinese smartphone maker Huawei is gaining unit share rapidly.
Xiaomi is also becoming a serious force in the market, and the Credit Suisse team believes it has a disruptive business model, making it a serious threat to its domestic rivals. The risk from Xiaomi is limited to China right now, however, as it lacks an international distribution channel.
Apple dominates the high end of the market
Samsung also has a strong presence in the high end of the smartphone market (phones priced higher than $500) along with Apple, however, the Korean smartphone maker faces serious problems here as Apple Inc. (NASDAQ:AAPL) continues to take share.
The Credit Suisse team estimates that this year the high end of the smartphone market could reach 342 million units and climb through 2017. This would suggest an increase of about 11 times from unit numbers in 2007.
Over the last two to three years, Apple has held about 48% of the high end of the smartphone market, and the Credit Suisse team expects Apple’s share to rise to 60% in the near future while Samsung’s share could fall to 24%. They attribute Samsung’s loss to the success of the bigger iPhone 6 lineup.
Warnings from Apple’s supply chain
In spite of these positive trends for Apple, analysts continue to warn that the company’s iPhone sales may disappoint in the near term. There have been several data points from Apple’s supply chain which suggest that the iPhone isn’t doing as well this year as it did last year, but the iPhone 6s lineup faces tough year over year comparisons as consumers happily gobbled up last year’s iPhone 6 models because they were the first iPhones with bigger screens. Also the above trends indicate that Apple’s iPhone isn’t done for any time soon.
As of this writing, shares of Apple are down 0.11% at $111.22 per share.
Graphs and charts in this article are courtesy Credit Suisse.