Instant Alert: The smartphone industry is slumping — and it may drag Apple and the iPhone down with it

Posted On 1:33 PM // Leave a Comment

Your Message Subject or Title

MANAGE SUBSCRIPTIONS

UNSUBSCRIBE

VIEW ONLINE

The smartphone industry is slumping — and it may drag Apple and the iPhone down with it

by Troy Wolverton on May 30, 2018, 4:31 PM

The smartphone market declined last year and research firm IDC expects it to slump again this year.
In a new report, Maxim Group analyst Nehal Chokshi argues the declining overall market will decrease demand for Apple's iPhones.
Thanks to falling iPhone sales, Apple's sales and earnings next year will fall far short of Wall Street's expectations, Chokshi forecast.

Depending on whom you ask, the next year or two could be the best of times for Apple — or the worst.

The company has been struggling over the last two years to grow unit sales of the iPhone. Optimists see that as a golden opportunity, because they think it means there will be lots of pent-up demand for new models. But pessimists think it's a prelude for what's to come.

Count Nehal Chokshi in the latter group. In a research note on Wednesday, the Maxim Group financial analyst warned that Apple's iPhone sales will likely decline in its next fiscal year, which starts in September, dragged down by the contraction of the overall smartphone market.

"We believe the smartphone market has now reached the stage of what the PC market reached in 2012 of consistent [year-over-year] declines," Chokshi said in the note, in which he reduced his rating on Apple's shares to a "hold" from a "buy." He continued: "We see risk that [Apple] will only maintain to lose modest share in [fiscal 2019] and as such, we are reducing our iPhone estimates."

Echoing some of Chokshi's pessimism, IDC put out its own forecast Wednesday for Apple and the smartphone industry. The market research firm expects overall smartphone shipments to decline by 0.2% this year after falling 0.3% last year. Despite that, IDC expects Apple's shipments to grow by about 2.6% this calendar year.

Although it was once known for its Mac computers, Apple is now basically a phone maker. iPhone sales accounted for about 64% of its overall revenue over the last 12 months and, quite likely, the vast majority of its profits.

Apple's has already been struggling to grow iPhone sales

But the company has been struggling for years to grow the business, a task made all the more important by the stagnation of its computer and iPad businesses and its inability to develop another hit product able to boost its revenue in a meaningful way. Apple's unit sales of iPhones grew by just 1% over the last 12 months, while its iPhone revenue grew by 10% over the same period.

Chokshi is forecasting that Apple's struggles will continue. Apple's smartphone sales are likely to be dragged down by the overall market, because the company doesn't have another hot product that will likely boost them, Chokshi said.

When the PC market went into decline, Apple actually grew its Mac business. But its Mac sales benefitted from the iPhone. Apple was able to convince many of its customers who loved its phones to buy one of its computers also, a phenomenon often referred to as the "halo effect." Don't expect history to repeat itself, Chokshi said.

We "do not expect a halo effect to support the iPhone franchise," he said.

Accordingly, while he expects Apple to sell about 223 million iPhones this fiscal year — up about 2.9% from fiscal 2017 — he thinks that number will drop to 208 million in fiscal 2019.

As a result, he thinks the company's sales and earnings will be significantly below Wall Street's current consensus estimates. He expects Apple to post $12.62 a share in earnings next year on $258 billion in sales. On average, analysts are projecting earnings of $13.27 a share on $272 billion in sales.

Chokshi's forecast stands in stark contrast to that of Daniel Ives at GBH Insights. Ives has argued that all the iPhone owners who have held off on buying recent models will be lured in by the next generation of phones, which are expected this fall. That will lead to a "massive" wave of some 350 million iPhone sales over the next 12 to 18 months, he forecast.