If your stock portfolio is made up of big mobile technology companies, you’re probably feeling a little worried about the return on your investment recently. Over the past months we’ve seen lots of troubling financial data and weak stock performances from many of the big smartphone companies. The chart below shows the stock performance of a selection of the industry’s big players since the beginning of the year.
Interestingly, only ZTE is better off than it was at the start of the year, share price wise anyway. The largest manufactures, Apple, HTC, and Samsung (SEC) are the worst performers so far this year, despite having some of the largest shares of the global smartphone market.
But even if you’re not an investor, stock prices are a good indicator of how the market views a company’s performance, and a troubled stock price often signals struggling fundamentals with a company. But what could possibly be wrong with this multi-billion dollar industry?
One simple explanation would be that the high-end market is simply becoming saturated with handsets, which is having a direct impact on the sales of handsets like the Galaxy S4, HTC One, and the iPhone. We’ve heard a lot of concerns recently about sales forecasts and results for the Galaxy S4 in particular, which we know is having a direct impact on the company’s valuation. If we compare estimates for the Galaxy S4 against the performance of previous Galaxy handsets, we can see an interesting new trend emerging.
So what does this tell us? Well, it looks like early smartphone adopters are just as keen as ever, we already know that the Galaxy S4 sold a lot of handsets in its opening quarter, but it appears that the average consumer is becoming less interested.
Sales estimates for the Galaxy S4 are now predicted to trail off at much faster rates than with previous handsets, dropping nearly 50% from their peak come the end of the year. Other Galaxy handsets, like the S2 and S3, had a lot of market staying power, but the Galaxy S4 may not. You can also see that the rate of growth is slowing too, down to 42.3% compared with sales increases closer to 90% for the previous generations.
The reason for this could be quite simple; people are already quite happy with their existing smartphones. Older handsets, like the Galaxy S2, are still more than capable at doing everything that most people need, and consumers may simply be more reluctant to change up for new models all the time when they don’t see a clear benefit.
An alternative explanation for this apparent trend could be that the market has become much more competitive over recent years, with more manufacturers producing handsets all within the same price ranges. Looking back to the days of the Galaxy S2 and S3, Samsung’s smartphones were the only real competition to Apple’s dominant iPhone. Since then, HTC, Sony, LG, and even company’s like Pantech and ZTE, have all released high-end products into the market with competing features and prices.
This could certainly account for a squeeze in each manufacturer’s market share, but that explanation doesn’t quite fit in with the continued dominance by Samsung that we’ve observed recently. However, competition does incur other costs on companies, such as marketing, handset subsidy costs, and even legal battles.
Increased competition is clearly very good for consumers, but it has an adverse effect on profit margins, which is a major factor in determining the value of the company.
Growth in budget products
So if the high-end market is overly competitive and saturated with handsets, perhaps companies should start looking to the mid-range and budget ends of the global market to pick up some more revenue. The chart below confirms what we’d already expected about the premium market, that it’s become saturated, but also reveals a great opportunity at the cheapest price point.
Since 2008 the highest price range has shrunk by about 8%, whilst the lowest range has grown by 18%. A lot of the movement has also caused a squeeze on the mid-range market, and it’s clear that the top price range is also stagnant. With more and more players entering the market, and huge emphasis being placed on sales of flagship devices, is it any wonder then that high-end handsets are seen to be under-performing?
As technology costs come down we are clearly now at the point where smartphones can be provided at lower prices, Firefox OS has already demonstrated this, and there’s clearly a growing demand for these handsets, which some the big manufacturers haven’t managed to capitalize on yet.
Perhaps we are nearing the peak in terms of high-end smartphone sales, but as we’ve been hinting at for quite a while, budget and emerging markets could well determine the next big name in the industry.
Realignment of expectations
All of the points mentioned so far are highly tentative, and are heavily dependent on factors in the wider industry that are highly unpredictable.
Take a look at HTC’s sales revenue for example, it’s simply very difficult to accurately gauge consumer reactions to a product. Even with glowing reviews and strong consumer support for its flagship One, HTC failed to meet analyst forecasts. It’s worth noting that HTC didn’t even do anything wrong here, analysts simply misjudged the figures. But even so, expectations make up a huge part of a company’s valuation, and a failure to meet them is often cause for a re-evaluation.
Similarly, the Galaxy S4 is falling short of many investors expected sales figures, but who’s to say that these targets were ever attainable in the first place?
Many analysts appear to have expected the launch of various high-end products to generate a new boom in the smartphone market. But in a slowed global economy, these sales simply never matured, which accounts for the general decline we’ve seen across the industry.
Is there really anything to worry about?
To be honest, the almost universal decline in share prices are probably a combination of all the factors above. But are any of the issues above really fundamental problems which will have a lasting impact on the smartphone industry?
In my opinion, probably not. It’s clear that the market is shifting slightly, but that’s a constant process in every single industry. High-end smartphones make not be as lucrative as they were before, but that doesn’t mean that money can’t be made and that innovation won’t happen.
The smartphone industry has taken a little shock after missing expectations with this new line-up of flagship products, but there are lots of new opportunities on the horizon. The growth of LTE and high-speed data networks, faster processors, and better displays, are all advancements that are sure to capture the interest of consumers. And don’t forget, the smartphone market is still growing across the globe, it’s certainly not time to sound the alarm bells just yet.