- The smartphone trend is bound to continue as 25% of the world has low penetration levels.
- 2015 was stellar in growth so it is logical that 2016 will be somewhat slower.
- Valuations are really cheap when compared to the general market.
The smartphone industry is not only interesting because it includes the biggest company by market capitalization (Apple – NASDAQ: AAPL) but also because it is in a global growing trend and has low valuations. This article is going to provide an overview of the industry and its two biggest players.
Global smartphone sales have been growing constantly in the several last years and this has been very rewarding for investors that invested in the industry at its beginnings.
Figure 1: Global smartphone sales growth. Source: Statista.
But fears are increasing that this amazing growth story is about to stop as many estimates show slower growth of smartphones sales, and some even estimate a fall in 2016 based on the first ever smartphone shipments decline in Q1 2016. Global smartphone shipments fell 3 percent annually from 345.0 million units in Q1 2015 to 334.6 million in Q1 2016. Samsung is the market leader and shipped 79 million units in Q1 2016, a 4% decrease, while Apple shipped 51 million units, a 16% decrease in relation to Q1 2015. The third player in the market is Huawei, an employee-owned Chinese manufacturer that grew its market share from 5% in 2015 to 8% at the begin of 2016.
Even with the current stall in growth the numbers still look stellar and the we cannot say that the industry is finished just by one declining quarter. Especially after Q1 2015 was 21.5% better than Q1 2014 due to the new iPhone and Galaxy smartphones, so that was tough to beat. In general, the industry is expected to continue on its growth trajectory and only stall in 2018.
Figure 2: Smartphone sales outlook. Source: Statista.
But the above data seems pessimistic when we know that current global smartphone penetration is at 50% and is expected to grow to 60% in 2020 according to the Mobile Economy Monitor. Developing countries like Indonesia and Brazil have penetration rates below 25%, and India has a smartphone penetration rate of only 13%. The three countries together represent 24% of the global population, so there is plenty of room still to grow.
Figure 3: smartphone penetration levels. Source: smsglobal.
Now that a trend has been identified, let us see what the valuations are in the business in order to estimate the risk and rewards of a potential investment.
As the smartphone market is very fragmented we are going to analyze the two biggest players which should give an indication for investors willing to dig into the multitude of smaller smartphone producers in order to find the new Apple.
Figure 4: Smartphone market share. Source: Statista.
Huawei will be left out as you can only invest in it if you are an employee and you work for the company in China. Good luck with that.
Samsung has 24% of smartphone market share but is not a purely mobile company. Consumer electronics, Device Solutions and Display panels account for 46% of revenue, while 54% comes from selling mobile devices. Samsung has witnessed declining revenues in the past 3 years as their other segments find it difficult to compete, but mobile growth keeps revenue at a high level of 200 trillion Korean Won or $173 billion. EPS are $118 and the share price is $1,050 which gives a PE ratio of 8.9, a price to book value of 0.9 and a dividend yield of 1.7%. As Samsung is a global company, investors do not have to be concerned about the Samsung’s reporting currency. Samsung has no long term debt.
Apple has a market share of 15% and mobile devices represent 65% of total sales. Apple has also witnessed its revenue decline in this decade due to seasonal effects and the difficulty in topping the iPhone 6 sales boom of 2015. This decline brought the share price down to the current $98.94 that gives a PE ratio of 11, price to book value of 4.2 and a dividend yield of 2.2%. Unlike Samsung, Apple has 35% of its assets financed by long term liabilities and 90% of its cash hoarded abroad.
The goal of this article was to give an overview of the smartphone industry and not to give investment advice. Much more research is needed to accurately grasp the risks and rewards from an investment in the industry, and in depth analysis is needed to find the next success stories in the sea of new small players. But, the analysis of the two biggest players shows that their valuations are relatively low in comparison to the general market, especially when we know that 2015 was an explosive year with 21% growth and it is logical that it will be difficult to top in 2016. This pause in growth has created large fears in the market and brought valuations down. The low valuations in correlation to the long term upward trend represent an interesting investment opportunity.