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This Research Report Is Bad News for Apple

By Jamal Carnette, CFA - Apr 5, 2016 at 8:38AM

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Gartner's report points to more headwinds for Apple.

From left to right: Apple's iPhone SE, iPhone 6s, and iPhone 6s Plus. Image Source: Apple 

Even a pedestrian observer can tell you the biggest risk to Apple (AAPL -2.46%) as an investment is an iPhone-sales slowdown. After former CEO Steve Jobs debuted the product in 2007, the iPhone became the company's highest-grossing product by 2009, pushing past the iPod. The iPhone continued to grow at an annualized clip of 57% for seven years, from $6.7 billion in fiscal year 2008 to $155 billion last year. In fiscal year 2015, 66% of Apple's total revenue came from iPhone sales.

More recently, however, the iPhone's growth has started to slow. During the last two quarters, the company's iPhone growth rate has significantly underperformed its long-run average. In the company's recently announced first fiscal quarter earnings, the segment narrowly avoided a year-over-year revenue decrease. For a visual representation of the iPhone's importance to Apple as an investment and its slowing growth on a quarterly basis, see the chart below:

Source: Apple's 10Qs. Revenue figures in millions.

Recently, research firm Gartner (IT 3.60%) announced its estimate for device sales shipments through 2018 and the news isn't encouraging to Apple.

Goodbye double-digit smartphone growth
According to Gartner's research director Ranjit Atwal, the smartphone market is expected to cool. Gartner expects global smartphone shipments to reach 1.5 billion units this year, posting 7% growth over last-year's total. For mobile phones overall, the company expects sales to average 1.8% annualized through 2018. Atwal summed up Garter's projections by saying, "the double-digit growth era for global smartphone markets has come to an end."

Even worse for Apple, Gartner predicts important markets like China and North America are going to grow at an even slower clip than the headline number. Atwal predicts China will provide 0.7% shipment growth with North America increasing only 0.4%. In fiscal 2015, Apple experienced year over year revenue growth of 84% and 17%, respectively, in Greater China and Americas. Overall, nearly two thirds of Apple's revenue last fiscal year were split between these two operating segments.

There are differences between the data. First, Apple reports total revenue per geographical locations and not simply iPhone sales. However, PC and tablet sales actually slowed before smartphone sales and Gartner expects year-over-year decreases for both devices in 2016. The second is Apple's Americas includes South and Central America, whereas Atwal's comment was only for North America.

Upgrade delays in both developed and developing markets
Interestingly enough, Gartner credits upgrade delays for slowing smartphone shipments in developed and developing markets. In developing markets, the upgrade is from low-cost mobile phones to lower-cost smartphones. Apple recently debuted its iPhone SE at a lower price point, but many of these first-generation smartphone consumers are better fits for low-cost manufacturers.

There are a few countries projected to continue to grow smartphone shipments substantially. Gartner specifically mentions India as a developing country with strong year-over-year smartphone growth of 29% and Apple's starting to invest more heavily in the country.

In developed markets, Gartner also blames "complex" carrier deals and incremental improvements for slower upgrades. In the United States, there's been a shift away from device subsidies to a phone-financing model. Whether this will increase or slow refresh cycles has been heavily disputed, but Gartner's data seems to support the latter. Perhaps Apple can reverse its recent funk and continue to grow iPhone sales at its long-term rate by stealing market share, but the overall environment will present headwinds to the company's most important product.

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