Apple Is Hitting a Ceiling -- and Tim Cook Knows It

Even though Apple's new capital return program that entails giving back $100 billion to shareholders should hopefully set a price floor for shares, the iPhone maker is also running into a ceiling at the same time: There's simply not much growth left in the high-end smartphone market.

That's the abundantly clear takeaway from the latest figures by market researcher Strategy Analytics. While the 37.4 million iPhones that Apple sold in the first quarter were better than most expected, the figure represented just 7% growth from a year ago. Meanwhile, rivals are gaining traction primarily in lower market segments that Apple has historically left alone.

Vendor

Q1 2012
Units

Q1 2012
Market Share

Q1 2013
Units

Q1 2013
Market Share

Samsung

44.4 million

28.9%

69.4 million

33.1%

Apple

35.1 million

22.8%

37.4 million

17.9%

LG

4.9 million

3.2%

10.3 million

4.9%

Huawei

5.1 million

3.3%

10 million

4.8%

ZTE

4.6 million

3%

9.1 million

4.3%

Others

59.7 million

38.8%

73.3 million

35%

Total

153.8 million

100%

209.5 million

100%

Source: Strategy Analytics.


Strategy Analytics calls out LG as a particularly strong performer, more than doubling its units over the past year and climbing to the No. 3 spot. LG is using some of Samsung's own tactics against it, including wide distribution. Vertical integration and product imitation aren't hurting its prospects, either.

The total market grew by an impressive 36% to 209.5 million units -- meaning Apple's unit sales significantly underperformed the broader market. CEO Tim Cook specifically addressed this on the last conference call, when asked by Bernstein analyst Toni Sacconaghi.

Cook acknowledged that even after normalizing for channel inventory to arrive at actual sell-through, Apple still "grew less than" the broader market. He took the opportunity to mention other relevant statistics beyond unit share that Apple considers when evaluating its overall health, including customer satisfaction and loyalty, ecosystem commerce, and usage, to name a few. It's also worth noting that lower market segments are less profitable, so rivals gaining unit share doesn't translate into growing profit share. Apple still owns that department.

Cook then hinted that Apple would indeed be focusing on affordability in emerging markets going forward:

Now, that said, we see an enormous number of first time smartphone buyers coming to market, particularly, in certain countries around the world. And so what we've done with that is and we started last quarter is we've made the iPhone 4 even more affordable and which has made it more attractive to first time buyers and [our supply caught up with demand] toward the late in the quarter last quarter and we are continuing to do that in other markets.

The iPhone 4, a three-year-old smartphone, is still selling strong, thanks in large part to Apple's ecosystem advantages and Apple's recent moves toward affordability in important markets like Brazil, India, and China (the "B," "I," and "C" in "BRIC").

Clearly, tapping emerging markets is on Cook's mind. Clearly, an affordable iPhone is in the works.

Just because Apple's hitting a smartphone ceiling doesn't mean its story is over. There's plenty of opportunity in Apple's future. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy and sell Apple and the opportunities left for the company (and your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.


 

The article Apple Is Hitting a Ceiling -- and Tim Cook Knows It originally appeared on Fool.com.

Fool contributor Evan Niu, CFA owns shares of Apple. The Motley Fool recommends and owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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