(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)
By Robert Cyran
NEW YORK, Jan 28 (Reuters Breakingviews) - Apple (AAPL.O) and Samsung (005930.KS) shouldn't expect the earnings bandwidth for smartphones to keep growing much longer. The number of advanced handsets sold last year grew an incredible 43 percent to 700 million. They now account for more than two-fifths of the otherwise stagnant cellphone market, according to Strategy Analytics. Simple mathematics suggests growth will slow – at this rate, their slice would be bigger than the whole handset pie within two years. Tech history also suggests prices will continue to fall. That’s a toxic combination for margins.
Just look back in history at what happened to PC makers at a similar point in their development. Half of homes in the United States had a computer by the end of 1998, after almost doubling in three years. The rate of growth then slowed and eventually reached a crawl. Unfortunately, prices continued their march downward, falling more than 90 percent since 1998, according to government statistics, as the price of chips and other parts became commodities. That encouraged PC firms to turn from finding new customers to using price wars to lure them from rivals.
This hurt PC makers. Dell’s DELL.O net margin reached 8 percent in 1998 and 1999 before steadily shrinking. Its margin has averaged around 4 percent over the past five years, while its shares have lost about three-quarters of their value since 1998.
There are already signs that smartphone makers are in a similar bind. Last week Apple reported flat earnings in the most recent quarter, with lower margins on its newest iPhone shouldering part of the blame. And Samsung warned last week that it expected intensified competition in the handset market as smartphone growth slows this year.
But that doesn’t mean that all of history will repeat itself. Dell’s stock traded at more than 70 times earnings in 1998. Investors weren’t prepared for falling margins so stockholders fled once they arrived. The multiple then shrank – the stock now trades at less than eight times estimated 2013 earnings. Apple currently trades at about 9 times estimated earnings. Considering its overall performance and its $120 billion cash pile, that looks too low. But at least investors are far more prepared for falling margins this time round.
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- The number of smartphones sold worldwide in 2012 grew 43 percent to 700 million, according to Strategy Analytics. The research firm estimates the cellphone market as a whole grew 2 percent to 1.6 billion.
- In 2012, 479 million Android smartphones were shipped, more than doubling the 239 million shipped in 2011. The number of iPhones grew 46 percent to 136 million.
- On Jan. 25, Samsung said it expected intensified competition for handsets in 2013 as growth for smartphones slowed to “the mid single digits”.
- On Jan. 23, Apple reported net income of $13.1 billion for the quarter ending Dec. 29. That was flat compared to the same period in the previous year.
- Strategy Analytics press release: link.reuters.com/nar55t
- Reuters: Samsung puts lid on capex for 1st time since financial crisis [ID:nL4N0AU04E]
Curiouser and curiouser [ID:nL1N0ASLSF]
- For previous columns by the author, Reuters customers can click on [CYRAN/]
(Editing by Antony Currie and Emily Plucinak)
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