Although shares of Apple Inc. (NASDAQ:AAPL) have recovered somewhat since dipping below $400 in April, they’re still far removed from their peak above $700.
But that could be a mistake. Increased competition in the smartphone marketplace is certainly good for consumers, but not necessarily the companies themselves.
Samsung’s S4 Margins
Samsung Electronics’ margins on the Galaxy S4 could be less than Apple Inc. (NASDAQ:AAPL)’s margins on the iPhone 5, according to a report from IHS. Evidently, it costs Samsung about $237 to build the 32gb version of the Galaxy S4 — which it then sells for about $700. An unlocked 16gb version of the iPhone sells for roughly the same, but Apple Inc. (NASDAQ:AAPL) only spends about $205 making it.
There are other problems with investing in Samsung — you aren’t really buying a smartphone company.
While over half of Apple Inc. (NASDAQ:AAPL)’s revenue and most of its profits come from the iPhone (thus making it a more pure smartphone play), Samsung Electronics is a conglomerate. In addition to its Galaxy devices, the company is also involved in TVs, cameras, and computer parts. It’s also a major supplier to its competitors.
Further, any investors interested in Samsung should spend some time researching the concept of the South Korean chaebol. Samsung is one of these chaebols, which means that although Samsung Electronics is an independent company, it has ownership ties to the rest of the Samsung family — businesses involved in such diverse industries as life insurance, heavy machinery, and amusement parks.
Can One phone boost HTC?
HTC has received a lot of attention lately for its new phone — the One. Many major tech reviewers have labeled the One the best available Android smartphone, superior to Samsung’s flagship Galaxy S4.
But will those reviews translate into great sales? Samsung has a bigger advertising budget and a more established brand name. What’s more, the One isn’t even available on Verizon Communications Inc. (NYSE:VZ) — the biggest carrier in the US.
Further, the One might be more of an aberration, rather than trend for HTC. While Samsung has found success with its entire Galaxy lineup, HTC has had more duds than hits.
Take its recent experiment with Facebook Inc (NASDAQ:FB) — the HTC First. In terms of specifications, the phone was a decent value for the $99 price tag it once carried (on contract). Yet, clearly the phone has been a tremendous failure, as its price has been cut to $0.99 less than a month after being released.
Verizon’s comments on the smartphone market
Speaking of Verizon Communications Inc. (NYSE:VZ), the company made some interesting comments about the smartphone market in general on its last earnings call. Although it sees new smartphones as a continued area of revenue growth, it believes that competition is spurring a price war between competing smartphone giants.
Fran Shammo, Verizon Communications Inc. (NYSE:VZ)’s CFO, remarked:
“So around this, again, I go back to, if you look at the history of basic phones and what happened over time, again I think the smartphone category will also follow this, where, as the competition and innovation, as new phones come to market…as more ecosystem comes here and more competition happens, the cost of these phones will eventually start to decrease.”
“And we’ve already seen some of this competition happen in certain categories, with the decrease of smartphones. We’ve launched smartphones in prepaid. That gives you an indication that there’s some low end smartphones out there, because we really don’t subsidize much on the prepaid product.”
Verizon Communications Inc. (NYSE:VZ) noted that the increasing shift from 3G to 4G smartphones has led many subscribers to move to shared data plans — leading to higher revenue per account.
But the move from, for example, the 3G iPhone 4S to the 4G iPhone 5 does not appear to be a driving factor for the actual smartphone companies themselves. Apple continues to sell a great deal of older model iPhones.
Apple bounces back
Apple Inc. (NASDAQ:AAPL) shares have gained over 10% since their recent lows, but most of those gains seem to have come from the company’s capital allocation plan — not on hopes for future growth.
Given the comments CEO Tim Cook made on the company’s last earnings call, the Cupertino tech giant likely won’t have a new iPhone model available for several months. Accessory products like an iWatch could help Apple’s overall iPhone business, but the company’s modest guidance would suggest that not even Apple expects much iPhone growth.
It wasn’t long ago that Apple had a virtual monopoly on the smartphone market, but times have changed. In addition the aforementioned S4 and One, Apple must also contend with competing products from LG, Motorola, Sony and even BlackBerry and Nokia Corporation (ADR) (NYSE:NOK).
Apple might not be the worst investment from a value standpoint, but the iPhone is no longer capable of generating the type of impressive growth Apple has seen in recent years.
Has the smartphone market matured?
The bottom line is that the smartphone market appears to have matured at this point. The screens might improve a bit, the processors might get faster, but innovation seems to have slowed significantly.
The only markets left to exploit seem to be at the low end. This might lead to more unit sales, but margins will no doubt be reduced.
That doesn’t mean smartphone stocks are guaranteed to be horrible investments — just that they won’t offer the type of growth investors have come to expect in recent years.
The article Looking for Growth? Avoid Smartphone Companies originally appeared on Fool.com and is written by Salvatore “Sam” Mattera.
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