Apple Is Hitting a Ceiling -- and Tim Cook Knows It

Even though Apple's (NASDAQ: AAPL  ) new capital return program that entails giving back $100 billion to shareholders should hopefully set a price floor for shares, the iPhone maker is also running into a ceiling at the same time: There's simply not much growth left in the high-end smartphone market.

That's the abundantly clear takeaway from the latest figures by market researcher Strategy Analytics. While the 37.4 million iPhones that Apple sold in the first quarter were better than most expected, the figure represented just 7% growth from a year ago. Meanwhile, rivals are gaining traction primarily in lower market segments that Apple has historically left alone.

Vendor

Q1 2012
Units

Q1 2012
Market Share

Q1 2013
Units

Q1 2013
Market Share

Samsung

44.4 million

28.9%

69.4 million

33.1%

Apple

35.1 million

22.8%

37.4 million

17.9%

LG

4.9 million

3.2%

10.3 million

4.9%

Huawei

5.1 million

3.3%

10 million

4.8%

ZTE

4.6 million

3%

9.1 million

4.3%

Others

59.7 million

38.8%

73.3 million

35%

Total

153.8 million

100%

209.5 million

100%

Source: Strategy Analytics.

Strategy Analytics calls out LG as a particularly strong performer, more than doubling its units over the past year and climbing to the No. 3 spot. LG is using some of Samsung's own tactics against it, including wide distribution. Vertical integration and product imitation aren't hurting its prospects, either.

The total market grew by an impressive 36% to 209.5 million units -- meaning Apple's unit sales significantly underperformed the broader market. CEO Tim Cook specifically addressed this on the last conference call, when asked by Bernstein analyst Toni Sacconaghi.

Cook acknowledged that even after normalizing for channel inventory to arrive at actual sell-through, Apple still "grew less than" the broader market. He took the opportunity to mention other relevant statistics beyond unit share that Apple considers when evaluating its overall health, including customer satisfaction and loyalty, ecosystem commerce, and usage, to name a few. It's also worth noting that lower market segments are less profitable, so rivals gaining unit share doesn't translate into growing profit share. Apple still owns that department.

Cook then hinted that Apple would indeed be focusing on affordability in emerging markets going forward:

Now, that said, we see an enormous number of first time smartphone buyers coming to market, particularly, in certain countries around the world. And so what we've done with that is and we started last quarter is we've made the iPhone 4 even more affordable and which has made it more attractive to first time buyers and [our supply caught up with demand] toward the late in the quarter last quarter and we are continuing to do that in other markets.

The iPhone 4, a three-year-old smartphone, is still selling strong, thanks in large part to Apple's ecosystem advantages and Apple's recent moves toward affordability in important markets like Brazil, India, and China (the "B," "I," and "C" in "BRIC").

Clearly, tapping emerging markets is on Cook's mind. Clearly, an affordable iPhone is in the works.

Just because Apple's hitting a smartphone ceiling doesn't mean its story is over. There's plenty of opportunity in Apple's future. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy and sell Apple and the opportunities left for the company (and your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.


 

Read/Post Comments (5) | Recommend This Article (8)

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  • Report this Comment On April 26, 2013, at 9:57 PM, mdl00 wrote:

    Not much more growth...

    ...says you?

  • Report this Comment On April 26, 2013, at 10:06 PM, tychicum wrote:

    Apple doesn't actually want to compete on share. Cook has said as much several times.

    Apple just wants to make all of the profit.

    Right now Apple makes about 80% of the available profit and the remainder is split a zillion ways.

  • Report this Comment On April 26, 2013, at 10:24 PM, marv08 wrote:

    While growth has, without a doubt, slowed down, there is still growth. So "hitting a ceiling" it is not quite.

    Q1 was up 29% y-o-y, Q2 was up 7% y-o-y. In other words, in Q1 and Q2 combined they already sold 68% of the devices they sold in all of fiscal 2012, and there will be a new model in the fall. And all that without a noticeable contraction of ASPs. Slower, yes. But far from a disaster, too.

    The real question (and that data is not out yet), is what Apple's profit share will be for 2013. If they stay in the 70% region they captured in 2012, they have not hit any ceiling at all - it would just show that all growth in the smartphone market is in a segment where no money can be made. No reason to go for it.

  • Report this Comment On April 26, 2013, at 11:57 PM, applefan1 wrote:

    Apple still hasn't opened up all of the available markets yet. China Mobile is obviously a BIG potential for revenue, unit sales and market share growth.

    Plus, having a large screen iPhone to go after that market is also available.

    I think Apple should have made two screen sizes of the iPhone 5 and I think that would have helped tremendously over the past 2 quarters.

    In any event, they still have newer technology yet to be released and offering larger screen sized models and revamping their entire lineup to go after a broader market.

    Yeah, I'm sure if they redesigned the lower end phone to still retain a decent profit margin would be a great idea, but I don't know how inexpensive they are going to go. Apple typically doesn't like making cheap low end products since they typically don't yield enough profit to make it worthwhile doing it.

    It's hard to go against those low priced products since all those companies are doing is dumping product, making a little bit of money and providing a cheap throw away item.

  • Report this Comment On April 30, 2013, at 9:27 AM, ericbrady wrote:

    Apple's 17.9% share of the smart phone market is not the ceiling in my book. Why would you assume this is all the market share they will get? There will be many more users switching to iOS from Android than the other way locking in more market share over time.

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