Don’t buy the smartphone hype
As Apple prepares to launch its anniversary iPhone and Samsung unveils models that don’t blow up, technology equities in the US and Asia have soared on hopes for a new smartphone cycle. After 2016 saw high-end smartphone sales fall, investors are betting that consumers respond to geewhizz gadgetry by replacing their devices more often. We are not so sure.
After high-end smartphone sales dipped last year — rompting concerns about flattening S-curve adoption — the focus is back on technology as a driver of growth. Samsung’s S8 phone sports an OLED screen and facial recognition, while the next iPhone is trailed as being similarly endowed.
Last year investors started to see smartphones as a maturing technology, which like personal computers had come to satisfy most users’ needs. The hope now is for upgraded functionality to satisfy new wants and push consumers into an accelerated upgrade cycle, reversing the trend for smartphones to be kept for longer. Equity investors like the argument, which has helped push Apple and Samsung to new highs.
Widening the field of view, there are about 4.7 bln mobile phones globally with half being “smart” and the rest offering voice and texts. Smartphones sold in developing markets are usually made by Chinese firms and retail for about $150, but go for as little as $50. They usually run on Google’s open source Android system and involve pay-as-you go SIM cards.
For now, however, investor attention is mostly focused at the high end of the market and those firms’ key equipment suppliers. Samsung, which accounts for about 40% of the KOSPI’s YTD gain, is being cheered both as a maker of highend phones and a dominant supplier of components such as OLED screens. Korean equities have surged to new highs, while Taiwan is close to the peak hit in the super bubble of 1989-90.
So why be cautious? Despite an apparently cheery backdrop, smartphone producers face stiffer headwinds than in 2014, when the last big sales surge occurred in developed markets.
- Carrier subsidies on phone purchases have been scaled back so that consumers get less of a discount on their call charges when locking into a contract. With the Galaxy S8 priced at $750 and the new iPhone expected to sell for as much as $1,000, this shift may deter users.
- Despite hopes for new gadgetry, the flattening of the innovation curve is real, with most “normal” users happy with screen resolution levels and camera quality. In 2015, the replacement cycle for developed economy users was about 24 months; by last year it had jumped to 36 months.
- Apple and Samsung have seen sales decline in China, the world’s largest smartphone market as consumers move to local brands such as Huawei, Oppo, Vivo, and Xiaomi, and get used to new app ecosystems.
- There are supply chain risks from adopting radical design shifts and new hardware features. In a push to deliver cutting-edge technologies, firms may push out features that are not ready for prime time. Samsung’s exploding batteries last year showed the risk of rushing, and even Apple has seen delays with recent product launches due to supplier bottlenecks for particular components.
Hence, if the high end of the smartphone market is overhyped, investors should consider playing the theme through supply chain firms, which for the most part remain reasonably valued. To be sure, there is mixed evidence of increased smartphone activity boosting Taiwan’s technology exports, with April’s data just coming in surprisingly weak.
Still, second-tier smartphone makers represent two thirds of the market and as these firms adopt the same OLED screens and facial technology systems as the big-two, the supply chain will be well placed to deal at scale.