The events of the last two months have validated that thesis. Smartphone demand has stalled, and smartphone stocks have performed poorly. Going forward, investors in these companies will have to brace themselves for limited growth.
Apple’s iPhone 5 struggles
Apple Inc. (NASDAQ:AAPL)’s struggles with the iPhone 5 appeared just shortly after the phone’s launch. That event coincided almost perfectly with Apple Inc. (NASDAQ:AAPL)’s all-time high. Although the iPhone 5 has sold well (it’s the world’s single best selling phone), it failed to live up to the expectations of optimistic Wall Street analysts.
Apple Inc. (NASDAQ:AAPL)’s stock steadily dropped last fall and early winter, as supply chain checks indicated that the demand just wasn’t as fantastic as what had been expected. The stock has largely traded range bound between $400 and $450 since.
Samsung’s Galaxy S4 disappoints
Some investors, seeing Apple Inc. (NASDAQ:AAPL)’s falling momentum, may have shifted into Samsung, whose Galaxy S3, S4, and Note 2 appeared to be the “next big thing.”
But to do so would’ve been a mistake. Although Samsung’s latest flagship, the Galaxy S4, had a robust launch, demand for the phone quickly cooled. Shares of Samsung fell Friday after the company reported disappointing earnings.
Like Apple Inc. (NASDAQ:AAPL), Samsung appears to have hit a similar wall in terms of smartphone demand.
HTC’s One can’t save the company’s sales
HTC’s latest Android handset, the HTC One, has been praised by tech reviewers. Many, citing the phone’s aluminum body, have said the phone is the best Android handset on the market.
Nevertheless, that wasn’t enough to save HTC’s bottom line. The company reported a bad quarter last week, with profits falling over 80%. While revenue was up big in May (right after the launch of the One), it plummeted in June (likely because everyone who wanted the phone bought it in May).
Where’s the growth?
With smartphone penetration already above 50% in the U.S., and major smartphone companies disappointing investors, I don’t think it’s unreasonable to declare the great smartphone growth era over.
It seems that everyone who can afford a smartphone already has one. And though they’ll likely be in the market for a new phone every two years or so, the tremendous growth that investors in these companies have enjoyed is over.
If there’s any growth to be found, it’s in the low-end of the market. Either in developing markets, or among those consumers in the developed world that can’t afford an $800 phone.
There are literally billions of consumers in developing economies that still need a smartphone; unfortunately, their budgets aren’t much more than $100. Samsung supplies phones to this demographic, but makes basically nothing doing it.
Berenberg analyst Adnaan Ahmad estimates that Samsung sells its cheap phones at a margin of roughly 1% — almost all of the company’s profits come from its high-end, high-margin Galaxy handsets.
The mid-tier sweet spot?
One frontier that might still be open for conquest is the middle of the market — those consumers in developed nations that can’t afford a high-end phone. Many of them might use prepaid plans that don’t offer phone subsidies.
For them, a $200-$300 phone might be ideal. That’s likely the demographic Apple Inc. (NASDAQ:AAPL) will be targeting with its rumored budget, plastic iPhone. MacRumors speculates that the upcoming phone will be priced at $300 — far too expensive for the developing market, but ideal for a U.S. consumer on Virgin Mobile.
This might also be the market Google Inc (NASDAQ:GOOG)’s Motorola is targeting with its upcoming Moto X. Until recently, the Moto X was widely expected to be a flagship handset. However, some reports have claimed that the phone will retail for $200-$300.
Unless Google opts to heavily subsidize the phone (possible), it will likely go head to head with Apple’s budget iPhone for the mid tier market.
While Motorola is a small part of Google Inc (NASDAQ:GOOG)’s business, the unit has weighed on Google’s shares since the acquisition, costing the company several hundred million dollars per quarter. But, a well-received Moto X could turn the Motorola unit from an asset to a liability, and help justify Google Inc (NASDAQ:GOOG)’s above average multiple.
Investing in the smartphone space
Smart investors have been able to make a fortune in smartphone names over the last few years, but the party may be over. Although these stocks might not be the worst investments, their ability to return outsized gains seems limited in light of the market’s saturated state.
If there’s any profitable growth left, it will be found in the middle — those phones priced around $200-$300. Google’s Moto X and Apple Inc. (NASDAQ:AAPL)’s plastic iPhone could capitalize best on that space.
At any rate, investors looking for the next great growth story should look elsewhere.
The article The Smartphone Market Is Saturated originally appeared on Fool.com and is written by Salvatore “Sam” Mattera.
Joe Kurtz has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google. Salvatore “Sam” is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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