Declining Smartphone Category: AAPL Implications

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The smartphone industry has been losing steam for the last few years, with negative growth in 2018. Consumers don't feel the need to replace their smartphones as often when the improvements made on the new models are becoming increasingly marginal. Below you can see global quarterly smartphone shipments by company with Samsung GOOGL Android OS) & Apple AAPL leading the negative growth trend, while Huawei has been able to progressively gain market share by providing foreign consumers with a wide breadth of affordable options (data from Counterpoint Research).

Apple has been playing tennis with Huawei for the #2 market share spot in the smartphone category. Huawei is well on its way to attaining sole possession of that #2 spot with 22% YoY shipment growth since 2016 while Apple has seen declining global smartphone shipments of just over 2% in the same time frame.

Apple saw lower iPhone sales across all of their geographical regions for Q4 2018 (Apple's Fiscal 2019 Q1). Its most substantial losses being in China, which can be partially attributed to the trade conflicts, as well as Japan. All in all, consumers just weren't impressed with any of the marginal improvements that Apple has made on the iPhone.

Galaxy Fold

Samsung is expected to release the first ever foldable smartphone, the Galaxy Fold, next Friday (April 26 th ), which will likely take even more market share from AAPL if successful. This $2,000 smartphone folds-up into a 4.6" "pocket-size" phone and expands to a massive 7.3" display, the size of a small tablet. Tech reviewers who were able to preview the Galaxy Fold voiced some concerns. A few of the reviewers thought the top layer of the screen was a screen-protector only to realize that they were peeling away the screen when attempting to remove it. Samsung has seen this as a minor setback and still plans on going through with its release. Samsung quotes that the phone is usable for about 200,000 folds; this claim will be put to the test after its release next Friday.

Apple Outlook

Over 60% of Apple's top-line is driven by iPhone sales but this number is falling as iPhone sales struggle. Apple has seen the largest gains in its wearable devices, home & accessories, which has been driven by their AirPod headphones and Apple Watch with advancements attracting the attention of fitness enthusiast across the world. iPad sales have also seen some sizable growth this past quarter with the improvements in the new iPad Pro driving most of that revenue. These two segments only make up about 16% of the company's total revenue though. Apple is going to have to wow consumers with their next iPhone if they want to remain the tech powerhouse we know and love.

As an investor, I am very hesitant to invest in a company that relies so heavily on one product especially when the product is seeing declining sales. Apple needs to diversify its portfolio further with investments in projects with positive NPV's. Apple is currently sitting on an $86.4 billion pile of cash & cash equivalents that they should be putting to good use and broadening their value proposition. AAPL has seen over 29% in growth so far this year, still 10% off its high in October of last year. They are trading at a forward P/E of 16.75 which is on the higher side of their valuation as you can see below.

I would wait to see this multiple to get closer to its 5-year median of 14x before thinking about putting a long position on AAPL. As of now I would sit back and see how they perform in Q1 (AAPL's Fiscal Q2) with their earnings being released on the 30 th of this month. AAPL - Zacks Rank #3 (Hold).

Latest News on AAPL

Apple just settled a legal battle with Qualcomm QCOM paying somewhere between $5 and $6 billion in royalties that Qualcomm claimed Apple had been withholding, according to those informed in the matter. Apple had been paying $7.50 in royalties per iPhone and this would increase that to $8-$9 per phone. This gives Apple access to 5g modems for their iPhones which is a necessity for them to continue to compete in this space.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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