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Apple Inc.'s iPhone Woes Have Begun

By Tim Brugger – Mar 3, 2016 at 11:30AM

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The smartphone king already warned about an expected drop in iPhone sales this year, but the slide has already started.

There has been little for iFans to cheer the past few months, as Apple's (AAPL -2.63%) stock price meanders in the mid-$90 range. Despite reporting record earnings and sales of its flagship iPhone line-up last quarter, Apple is suffering from what most industry pundits expect will be a marked slowdown in higher-end, higher-cost devices this year.

To his credit, CEO Tim Cook wasn't shy about confirming the slowing sales forecasts, which seemed to hit Apple shareholders where they live. For many iFans, the expected drop in sales is uncharted territory. However, according to research firm Gartner (IT 0.72%), it appears the downward trend most expect from the global smartphone market has already begun.

Image source: Apple.

Just the facts
Overall, 2015 wasn't too hard on iPhone sales. According to Gartner, Apple sold 225.85 million smartphones last year, up from 191.43 million in calendar year 2014. The annual bump in unit sales in 2015 was good for a 15.9% share of the global market, a slight improvement from the prior year's 15.4%. That's the good news.

The not-so-good-news is how Apple ended the year. It should be noted that Gartner estimates sales to end users, not how many units Apple shipped to its laundry list of vendors. And on that basis, iPhones took a fairly good-sized hit in calendar Q4. During its conference call, Apple noted that it "sold 74.8 million iPhones in the quarter," a slight bump of 300,000 units from 2014's fourth quarter.

However, as Gartner's data indicates, there are probably several million iPhones sitting on retailers and telecom providers' shelves. Apple and its partners sold 71.5 million smartphones to consumers in Q4, down from 74.8 million the prior year. In addition to the more than 3.3 million unit sales decline year over year, Apple's market share eroded as well, from 20.4% in 2014 to 17.7% last year.

Apple's longtime manufacturing competitor Samsung (NASDAQOTH: SSNLF) bucked the downward trend to end 2015, inching up to 20.7% of the market after selling 83.44 million smartphones. Samsung was one of only a couple of vendors that improved sales year over year, but that may change this year, too, just as it's beginning to do in Apple's case. However, Samsung has an ace up its sleeve.

What's the big deal?
Not only does Samsung offer a bevy of electronics, it's knee-deep in low-cost smartphones in one of the few remaining growth opportunities left: emerging markets. Gartner expects that two-thirds of global smartphone sales will be of the "basic and lower-end" variety in just three years. And therein lies an opportunity for Apple.

The overriding concern for Apple is that it generated nearly 70% of its revenue from iPhones last quarter. The holiday shopping season certainly played a role in last quarter's lack of revenue diversification, but just two years ago iPhone sales accounted for "only" 58.68% of sales. With no sure-fire additional product on the horizon -- Apple's Watch or TV haven't exactly set their respective markets on fire as yet -- it's no wonder investors are on edge.

Alphabet (GOOG -1.38%) (GOOGL -1.45%), with its more than 80% share of the smartphone operating system (OS) market, could also be affected by slowing smartphone sales, but only minimally. Granted, a slowdown in smartphones sales won't exactly help Alphabet and its dominant OS Android, but the impact will minimal.

Alphabet derives the majority of its revenue -- about 90% of its $21.33 billion last quarter -- from digital spots, a market expected to dominate global advertising in the next couple of years. The growth of online ads will more than make up for a slowing high-end smartphone sales environment, particularly because Android can generate ad sales from both high- and low-end smartphones.

It's time for Apple to swallow its pride -- or whatever's holding it back from a golden opportunity -- and delve into emerging markets. The trend has become clear, and even sooner than expected: high-end smartphones will not drive Apple's growth, nor that of its competitors.


Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Tim Brugger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Apple. The Motley Fool recommends Gartner. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Apple Stock Quote
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