Is Apple Still a Growth Stock?
Apple Inc. (NASDAQ:AAPL) has risen to be a tech juggernaut, casting a long shadow across both the personal computer and smartphone industries. The company's iPhone has become ubiquitous in many parts of the world, and its enduring popularity has led to massive profits and brand influence.
Yet, no amount of love showered on Apple by fans, analysts or media personalities can overcome the iron laws of economics. While Apple continues to trade like it's a growth stock, its key profit driver - the iPhone - faces market saturation around the world.
Mounting mobile saturation
Beth Kindig, a tech stock analyst and commentator, has been following the smartphone market closely for years. In March, she highlighted the mounting signs of mobile saturation and their likely impact on Apple:
"The smartphone market contracted in 2017 to 1.462 billion units and in 2018 to 1.42 billion units, and is expected to return to minimal yet positive growth percentages at a CAGR of 2.5%. While 1.5 billion smartphones per year is substantial, the law of saturation is likely to drive prices down, with Android owning 85% of the market today, and we see decreasing iPhone penetration in China where lower-priced competitors gain market share."
The law of saturation is well understood, and has been observed across a multitude of products. Production saturation will see consumers become increasingly responsive to price while new market growth opportunities peter out.
Apple enjoys a strong smartphone market share, a fact that has helped power its growth narrative. Unfortunately, the smartphone market appears to have reached an inflection point, with the smartphone market beginning to stabilize - and even contract slightly - for the first time since the technology was introduced.
Proliferating price wars
Saturation is not the only threat to Apple's smartphone business. Competition has also been on the rise, especially in Asian markets. As Kindig explained in a Nov. 1 research note, smartphone pricing wars are already underway in Asia:
"Pricing wars are evident in Asia, where China's Huawei has grabbed market share to become the world's fastest-growing smartphone seller. The company has seen a 66-fold increase from 3 million units sold in 2010...Notably, IDC forecasts the pricing wars will continue with 5G handsets in Asia, as low-cost models are expected to hit the market next year. In the U.S., Latin America and Japan, the average selling price (ASP) of a 5G handset will be around $1,000, while it will be $600 in China."
Intensifying competition, especially when it becomes competition over price, tends to exacerbate companies' problems under the law of saturation. Thus far, Apple has failed to present investors with a coherent solution to this problem.
Little succor in services segment
As the iPhone's star has begun to fade in recent quarters, investors, commentators and fans have debated what Apple can do to keep its growth story rolling onward. For many, the answer lies in the company's services segment. Yet, as Kindig pointed out last month, this segment is both small and growing at an anemic pace:
"The media touts the services revenue as the answer to the iPhone decline. As we saw this year, double digit declines on the segment responsible for $165 billion in revenue (iPhone) is not easily staved off by a revenue segment posting $40 billion per year (services). If one did not look closer at the numbers, it would easy to think services was a major growth segment. We see the growth was at 18%, which is below the 20% traditional benchmark that defines growth. As of now, this doesn't appear to be the answer to the gaping iPhone decline. This is proven by the annual decline in overall revenue."
Clearly, services are not yet up to the task of carrying the load for a declining iPhone. While this segment will likely remain a key feature of analysts' and commentators' bull theses, there are few signs that their hopes of big-time growth and profits will materialize from it.
Verdict
Ultimately, when fantasy collides with reality, reality always wins. It will not be immediate, but it is increasingly clear that Apple's adoring investors are in for a rude awakening.
Disclosure: No positions.
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This article first appeared on GuruFocus.
