Smartphones have been a driving force of technology companies for the past decade. iPhone sales are what turned Apple Inc. (NASDAQ:AAPL) into a behemoth — since the release of the first iPhone, AAPL stock has grown over 880% in value.
Slower than expected iPhone X sales were the first hint the party might be losing steam, and a new report from Gartner makes it official.
For the first time ever, the tech research company recorded a smartphone sales decline in the fourth quarter of 2017.
Gartner Reports First Ever Worldwide Smartphone Sales Decline
Technology research company Gartner just published its report on worldwide smartphone sales for Q4 2017.
One increasingly familiar theme shouldn’t shock anyone: China’s Huawei and Xiaomi notched impressive sales gains. And as usual, Samsung and Apple placed one and two as the top smartphone vendors.
However, this report had a first: a decline in smartphone sales.
There was a year-over-year smartphone sales decline of over 24 million units in Q4, a drop of 5.6% compared to Q4 2016.
Gartner says that is the first drop in smartphone sales it has recorded since it began tracking the market in 2004.
Trouble for Apple?
Gartner’s numbers show Apple iPhone sales slid by over 3 million in the quarter compared to the previous year. The company didn’t lose market share thanks to the overall smartphone sales decline, but the numbers are worrying.
For years, AAPL stock has been propelled by iPhone sales. Last year marked the 10th anniversary of the iPhone, as well as the launch of the iPhone X — the most expensive iPhone ever. Along with the iPhone 8 and iPhone 8 Plus, this was expected to ignite an upgrade super cycle that would push iPhone sales to new levels. Instead, iPhone X sales were lower than expected and Apple notched a net decline in sales.
Anshul Gupta, research director at Gartner, noted two key factors in the Q4 smartphone sales decline:
“Two main factors led to the fall in the fourth quarter of 2017. First, upgrades from feature phones to smartphones have slowed down due to a lack of quality “ultra-low-cost” smartphones and users preferring to buy quality feature phones. Second, replacement smartphone users are choosing quality models and keeping them longer, lengthening the replacement cycle of smartphones.”
Apple doesn’t play in the “ultra-low-cost” segment and users holding onto iPhones longer was the problem the iPhone X was hoping to solve. So that Q4 performance is worrisome in terms of continued AAPL stock growth, but it gets more troubling if the slide is part of an overall industry trend instead of a misstep.
Repeating the Computer Industry Slump?
There are troubling parallels between this report of a smartphone sales decline and the PC industry.
In 2001, after years of growing sales as personal computers became a must-have in homes and offices, the worldwide PC industry saw its first ever global sales decline. That one turned out to be a hiccup, the result of turmoil over the dot-com bubble bursting.
But then in 2012, PC sales slid again. And kept sliding… It’s been pretty much downhill ever since for the PC. Last year, 262.5 million PCs were sold, compared to nearly 316 million in 2012.
With any luck — at least for those who own AAPL stock — this first time smartphone sales decline more resembles that 2001 scenario. A one-time event, maybe triggered by sticker shock over the iPhone X. By 2012, PCs were being replaced by tablets and smartphones, and at this point there’s nothing in the way of technology that is actually supplanting the smartphone.
However the warning signs are there that if we haven’t yet reached peak smartphone, we’re at least approaching it.
That means the pressure is on Apple to find another hit product.
The Apple Watch has done very well, especially in the last year, but it’s not shaping up to be a replacement for iPhone sales in driving AAPL stock growth. The HomePod is looking like a niche product. At the moment, Apple’s best bets appear to be making more revenue from fewer sales (boosting average sales price) for the iPhone, and continuing to grow its Services division revenue.
In the meantime, keep an eye on those smartphone numbers. One quarter of smartphone sales decline might be a hiccup. If that turns into a few quarters of low numbers, it could mark the beginning of the end of the smartphone party.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
