Over the past several years, there have been murmurs that the world was approaching peak smartphone. After all, smartphone penetration rates are around 80% for both developed and developing economies. Total mobile phone penetration rates, four decades after their introduction, are just a few points higher at 90%. Thus, the runway for growth in the smartphone market is increasingly short.
In early 2019, those murmurs turned into full-blown screams. Apple (NASDAQ:AAPL) cut its guidance based on weak iPhone demand in both developed and developing economies. Fellow smartphone giant Samsung cut its guidance, too. So did essentially every smartphone supplier in the world.
This is the first time we have seen such broad and widespread weakness across the entire smartphone industry. Perhaps that means the time has come. Peak smartphone is here. That isn’t great news for smartphone-related stocks. There are a handful of stocks that have risen significantly on the coattails of secular growth in the smartphone market. This growth is drying up. It will remain weaker for longer considering everyone who wants a smartphone, already has one.
As such, smartphone-related stocks that soared with a rising smartphone tide will struggle with a falling smartphone tide. Which stocks fall under this umbrella? Let’s take a deeper look at seven stocks affected by the global smartphone slowdown.
Of course, this list starts with the world’s premier smartphone-maker and the very company that confirmed we might be at peak smartphone — Apple.
The bad thing about Apple is that this company is more than half iPhone. Depending on the quarter, the iPhone has represented anywhere from ~50% to ~70% of revenues. Last quarter, that number was right around 60%. Thus, if the iPhone business is slowing (which it certainly is), then Apple’s entire business will slow, too.
The good thing is that Apple has a rapidly growing non-iPhone business that will ultimately lessen the company’s dependence on iPhone growth. This non-iPhone business comprises new hardware, like the Apple Watch, and software, like the App Store. Revenues in the non-iPhone business rose nearly 20% in the otherwise troubled holiday quarter.
Broadly speaking, because of its burgeoning non-iPhone businesses, Apple stock will be just fine long term, despite the fact that we may have just hit peak smartphone.
When Apple isn’t selling a ton of iPhones, that’s a big deal for Broadcom (NASDAQ:AVGO). According to the company’s most recent 10-K Filing, Apple represented about 25% of the company’s net revenue in 2018, with presumably a majority of that revenue coming from the iPhone. Thus, if Apple’s iPhone business is struggling, that means 25% of Broadcom’s business is struggling, too.
Because of this, AVGO stock fell just as much as AAPL stock following Apple’s shocking guidance cut. But AVGO stock trades at just 10X forward earnings. That’s pretty cheap. Plus, there is still the other 75% of the business. Some of that is wrapped up into smartphones. But, most of it deals with still-healthy end markets elsewhere along the semiconductor spectrum.
Long-term, AVGO stock will be just fine. First and foremost, this is a smartphone company, so the stock will reasonably struggle in the near future as the smartphone tide falls.
Admittedly, Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) is significantly less affected by the smartphone slowdown than smartphone-maker peers like Apple or Samsung. The company does have a smartphone (the Pixel), however, and the smartphone market is declining.
Pixel is presumably still a very small portion of Alphabet’s revenues. Between analysts and management, however, Pixel was mentioned 12 times in last quarter’s conference call. YouTube and Cloud were mentioned 30 times. Thus, Pixel is a small part of the Alphabet picture. But, not small enough to be insignificant in terms of valuation or growth prospects.
On the flip-side, Pixel growth may not be slowing with the global smartphone market. There is an argument out there that traditional smartphone innovation has been lagging, whereas Pixel innovation has actually excelled recently. That’s why consumers are more excited for the new Pixel phone than any other Android phone in 2019. Thus, there’s reason to believe that Pixel may actually be bucking the broader smartphone trend.
In the big picture, GOOG stock has exposure to the smartphone market, but it shouldn’t fall all that much because of a global smartphone slowdown. If it does, that is an opportunity to buy the dip.
Universal Display (OLED)
When you talk about companies that rose to the moon with the rising smartphone trend and have since crashed with a stalling out smartphone market, OLED screen-maker Universal Display (NASDAQ:OLED) should come to mind.
Smartphones are a cornerstone of the OLED revolution. In a nutshell, OLEDs are the next-generation of LED smart screens that are thinner, more flexible, and display deeper and more vibrant colors. One of the most common and obvious applications of OLEDs is the smartphone market. That is why the most recent generation of smartphones all have OLED displays.
But, OLED screens are also more expensive, and smartphone-makers end up passing those costs onto customers. Customers aren’t a big fan of this and are expressing so with their wallets. As iPhone prices have gone up to $1,000 and up, iPhone unit volumes have stalled out. That isn’t a coincidence.
As such, to reinvigorate growth, Apple and other smartphone makers may pass on OLED screens in the future. If so, the smartphone-led OLED revolution will take a break. As it does, shares of Universal Display will likely struggle.
When it comes to memory chipmaker Micron (NASDAQ:MU), it’s all about the music. Buy the stock when the music is playing or when demand outstrips supply, and revenues, margins and profits rise. Sell Micron stock when the music isn’t playing, or when supply outstrips demand, and revenues, margins and profits fall.
The music hasn’t been playing for the past several months. Supply has been catching up to demand. Revenue growth has stalled out. Gross margin expansion is turning into gross margin compression. Profits are peaking.
Falling smartphone demand further dampens the demand outlook for Micron. The more demand falls, the lower prices go; the lower margins fall, and the more profits get cut.
In the big picture, though, MU stock is already so cheap (4X forward earnings) that one could reasonably argue that weak smartphone demand is already priced in. That may be true. Further downside is hard to imagine. But this stock won’t stage its big comeback until margins improve, and its equally hard to see margins improving with smartphone demand depressed.
Opticals giant Lumentum (NASDAQ:LITE) has strong parallels with Universal Display. Much like Universal Display, the smartphone market has sparked a big boom and bust in Lumentum.
Lumentum went boom by becoming the company which provides the technology behind the iPhone’s new Face ID feature. This partnership sparked a huge rally in LITE stock from $15 in 2015, to $75 by early 2018. During that stretch, Apple also jumped to comprise 30% of Lumentum’s revenue.
Then, Lumentum went bust as the smartphone market stalled out in 2018. Since peaking in early 2018, LITE stock has fallen 40% to $45. Considering this company has ample exposure to the smartphone market, this huge sell-off makes sense.
But, all the negatives seem priced in now. The stock trades at just 10X forward earnings and is still behind market-leading Face ID technology which should see greater proliferation over the next several years. Thus, while weakness is here to stay in the near term, the medium-to-long-term outlook for LITE stock is fairly positive.
Source: Jeff Nelson Follow via Flickr
Following guidance cuts from Apple and Samsung, smartphone RF chipmaker Skyworks (NASDAQ:SWKS) — which has historically counted both Apple and Samsung as 10%-plus customers — cut its guide, too.
That’s no surprise, and SWKS stock had already fallen a bunch into the report. As such, because the bad news was already priced in, the guidance cut actually results in a rally for SWKS stock.
Despite Skyworks’ huge exposure to the smartphone market (47% of Skyworks revenue came from Apple last year), SWKS stock does appear to have bottomed. The stock trades at under 10X forward earnings, a low valuation even for this list of depressed smartphone suppliers. The sales multiple is also at just 3X trailing sales. That is the lowest valuation since early 2016, around the same time the stock staged a huge bounce back from a massive 2015 selloff.
All in all, while Skyworks is a stock that is hugely affected by a smartphone slowdown, it appears this negative impact is already fully priced in. Any good news on the smartphone front could consequently result in a huge rally.
As of this writing, Luke Lango was long AAPL, GOOG and SWKS.
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