Apple's Bigger Slice of the Smartphone Pie
ENLARGE Apple's larger-screen iPhone 6 and iPhone 6 Plus are negating some of the advantage that makers of Android-based phones enjoyed. An Apple store in Beijing. Bloomberg News
Dan Gallagher
Apple has long held a lucrative slice of the global smartphone market. Now, its upsized iPhone 6 models may be helping it carve out a bigger piece of the pie.
Investors appear to be betting on this: Apple's share price has surged more than 18% since the company reported its fiscal fourth-quarter results last month. It is also up nearly 50% for the year to date, making it by far the best-performing stock among large-cap tech companies. The Nasdaq Composite is up 14% for the year.
Despite Apple's market capitalization reaching the dizzying heights of about $700 billion this week, investors' optimism may not be far-fetched.
The iPhone transformed Apple from a niche computer maker into the world's most valuable company. Yet Apple's unrelenting focus on premium design has kept it confined to the upper crust of the smartphone market. Its share of global sales was about 13% for the first nine months of this year, while rival Samsung captured about 26% of the market, according to figures from IDC.
That dynamic may be starting to shift: The iPhone 6 and 6 Plus finally brought Apple into the world of larger-screen smartphones. This negates some of the advantage that Samsung and other makers of Android-based phones enjoyed. It showed in results for the quarter ended in September, which included the initial launch of the iPhone 6. Unit sales of iPhones jumped 16% year over year, while Samsung's smartphone shipments fell 8% in that period, IDC estimates.
Most analysts expect iPhone unit shipments to exceed 60 million for the December quarter. Some of this could come at the expense of its rival: about 19% of Samsung users surveyed recently by Consumer Intelligence Research Partners said they were considering switching to an iPhone with their next purchase.
The possibility that Apple could regain some share in the smartphone market is tantalizing. Every new buyer of an iPhone becomes part of the company's iOS platform, and the mix of content here is shifting from lower-margin sales of music and movies to more profitable apps and services. Sanford C. Bernstein projects Apple's revenue from the App Store will exceed that from iTunes media sales next year. App Store revenue carries gross margins of around 85% compared with about 20% for iTunes, the broker estimates. That means even incremental share gains can have an outsize effect on Apple's bottom line.
Apple's share in smartphones will likely remain limited by the fact that the company chooses not to play in the low end of the market. But the iPhone doesn't need to be the share leader to be a wildly profitable business, especially as new revenue-generating services such as Apple Pay become part of the ecosystem. The stock's strong run-up, and that market cap, inspire some nervousness. But at less than 12 times forward earnings, adjusted for cash, there is no reason to hang up on Apple now.
~Kris M.
Posted by: Just Murray <krismurray@gmail.com>
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