Apple, Inc. to Continue to Capture Lion's Share of Smartphone Profits for Years

The outlook for the smartphone market doesn't look nearly as rosy anymore. Smartphone market growth in the U.S. and Europe has already slowed to single digits. Further, IDC suggests that worldwide smartphone growth will rapidly decelerate in the next several years, too. Considering that Apple's (NASDAQ: AAPL  ) iPhone accounts for 56% of the company's revenue and an even larger portion of its operating income, should Apple investors be worried? Not necessarily -- Apple's fate can't be explained with a facile glance at a dwindling smartphone market.

Decelerating growth rates
Last year's global smartphone sales growth of 40% will be halved in 2014 to about 20%, IDC says. The U.S.-based market research company projects the trend to continue, with growth rates hitting 8.3% in 2017 and 6.2% in 2018.

Apple's own smartphone growth rates have also slowed recently.

Fiscal quarters used. Data for chart retrieved from SEC filings for quarters shown.

In fact, one of the probable reasons for the sell-off of Apple stock that followed the company's fiscal first-quarter earnings report was the lackluster iPhone year-over-year unit sales growth rate of just 7%.

With market growth rates declining and Apple's smartphone sales growth already in the single digits, is Apple doomed?

Apple's pricing power
Enter Apple's pricing power. Apple's 2013 average selling price, or ASP, of about $650 is about double that of the worldwide smartphone market's ASP. Apple's considerable pricing power helped the company capture about 87.4% of global mobile phone profits in the fourth quarter of 2013, according to estimates by Raymond James analyst Tavis McCourt. That's an impressive feat considering Apple's shipments only accounted for just 17.6% of total fourth-quarter smartphone shipments, by IDC's estimates.

Apple's iPhone 5s sells successfully in the market at a staggering entry price of $649.

Going forward, IDC estimates the disparity between Apple's pricing power and the rest of the market will grow. IDC expects a compound average growth rate of -1.2% for the price of Apple smartphones between 2014 and 2018 and a rate of -5% for the smartphone market as a whole.

Apple's iPhone business looks poised to reap profits for years to come. Already priced for little to no growth, any upside from new categories gives the stock upside potential with very limited downside.

Here's another way to look at it: With Apple's current levels of cash flow poised to remain robust in light of the iPhone's pricing power, Apple can continue to repurchase shares to boost EPS even in the face of flat or slightly declining revenue (and don't forget Apple's dividend). With that said, any upside from new categories, or from Apple's growing iPad segment, could be a major boon for the stock. Further, Apple tends to have greater pricing power than competitors in every category it enters so new categories could end up being cash cows, too.

Even when growth opportunities dwindle, cash cows can provide lucrative returns
One of the dirty secrets that few finance professionals will openly admit is the fact that dividend stocks as a group handily outperform their non-dividend-paying brethren. The reasons for this are too numerous to list here, but you can rest assured that it's true. However, knowing this is only half the battle. The other half is identifying which dividend stocks in particular are the best. With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.

Read/Post Comments (13) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2873266, ~/Articles/ArticleHandler.aspx, 8/31/2015 4:10:02 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Daniel Sparks

Daniel is a senior technology specialist at The Motley Fool. To get the inside scoop on his coverage of technology companies, follow him on Twitter.

Today's Market

updated Moments ago Sponsored by:
DOW 16,566.01 -77.00 -0.46%
S&P 500 1,972.57 -16.30 -0.82%
NASD 4,787.01 -41.32 -0.86%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/31/2015 3:54 PM
AAPL $113.04 Down -0.25 -0.22%
Apple CAPS Rating: ****