UBS: Smartphone market on the cusp of a decline?

Yes. But based on a proprietary consumer survey, team UBS is sticking with the sticky: Apple and Samsung.

From a note to clients signed by 11 UBS analysts (including Timothy Arcuri) that landed on my desktop Wednesday:

Ninth UBS Evidence Lab consumer smart-phone survey
We present our analysis of the ninth iteration of the UBS Evidence Lab consumer smart-phone survey covering 8,000 smart-phone owners across 6 key countries globally… At this point we assume a recovery in demand in 2020E to +2% with tailwinds such as 5G and new foldable products but we see near-term consumer demand as clearly negative.

Retention rates continue to provide some support to vendors
We do see some elements of support for Apple/Samsung as retention rates remain very strong (Apple 83%, Samsung 72%), ASP trends are supportive (implied for Apple +6%) and we see little that will disrupt these positions in the near term. Despite the ASP upside, we still assume iPhone revenue declines in 2019E by 3%. Our concept test on both the iPhone Xr/Xs shows that consumer interest is falling in new devices – suggesting that the market needs an innovation kick to stimulate demand.

FaceID/mobile payments rise in consumer importance but not across the board
We also assessed consumer perceptions of new features. While overall importance remains low for FaceID (2nd least important), it has developed some momentum in the last 12 months as penetration within iPhone users but not the Android market (which we see as a -ve for 3D sensing vendors). We also note that the importance of mobile payments has risen although also remains low on the list.

In a flat market – stick to the major players and select components, avoid EMS
We prefer OEMs with high retention rates (Apple/Samsung) and only consider suppliers with a strong content story, or those with already depressed valuation (Catcher, LG Innotek, Mediatek). We avoid volumes plays such as EMS…

Q: Can ASPs rise to still drive revenue growth?
Selectively. Having seen a significant step-up in ASP’s in 2018 as Apple stretched the upper end of smart-phone pricing higher, we believe it is becoming more challenging to stretch higher again. We believe this will start to reach a ceiling again and it will become more challenging to stretch higher without some further compelling value-added features. In the Android camp we believe the competitive intensity is continuing to limit price increases and, as unit growth slows, we believe competitive intensity could increase further.

My take: We haven’t been hearing much from the other analysts about stickiness lately. Perhaps because they haven’t based their work on consumer surveys.

9 Comments

  1. Gregg Thurman said:

    Our concept test on both the iPhone Xr/Xs shows that consumer interest is falling in new devices – suggesting that the market needs an innovation kick to stimulate demand.

    Wrong. Sales of last year’s models as less expensive used/refurbs make possible sales of this year’s new models and, importantly, increase the installed base of iPhone users that will purchase ever-increasing amounts ($) of Services/Content. Gee, what a concept.

    Having seen a significant step-up in ASP’s in 2018 as Apple stretched the upper end of smart-phone pricing higher, we believe it is becoming more challenging to stretch higher again.

    Wrong. As smaller, less expensive, LCD iPhones (iPhone 8 and older) move down and out of the iPhone lineup, iPhone ASPs will naturally increase until they peak in FY2021.

    2
    December 6, 2018
  2. Gregg Thurman said:

    I want to thank all the little people for selling their shares of AAPL at these bargain basement prices. This morning I added to my portfolio of Call Spreads with the acquisition of 75 DEC 11 $172.50/$175 Call Spreads purchased at $1.20. AAPL was trading at $170.89 when my order was filled.

    The average of AAPL’s three lowest intraday lows (since earnings) are $170.59 ($170.26, $170.88, $170.62), despite the extremely negative narrative re iPhone X(x) unit sales, tariff fears, and the arrest yesterday of Huawei’s CFO in Canada on a US warrant.

    1
    December 6, 2018
    • Gregg Thurman said:

      Bad me. I bought 80, not 75 contracts.

      0
      December 6, 2018
  3. Fred Stein said:

    Making a few rough estimates, Services + Watch + iPad and MacBook upgrades (both overdue) should increase top line by over $12B. Even a 3% decline in iPhone (minus $5B) leaves Apple with modest organic growth for FY 19. Buyback add another 6% or about 9% net EPS growth.

    That said, global factors could outweigh the above case.

    1
    December 6, 2018
    • Gregg Thurman said:

      It amazes me no end that WS first complained (and set low price targets) because Apple was a one pony shop (iPhone). Now, in the middle of shifting focus away from iPhone to other revenue streams that are not market saturated, WS criticizes Apple because iPhone unit sales are “weak” while praising firms (without the addressable installed base Apple enjoys) selling the same or similar services.

      3
      December 6, 2018
  4. David Emery said:

    I saw something that said that a consumer survey said expected sales of NEW iPhones was down below 60%. That’s actually an amazing number, that means that 40% of the iPhones being sold are -used- phones?

    0
    December 6, 2018
    • Robert Paul Leitao said:

      David:

      The last data I saw from a Street analyst suggested just over 25% (270 million iPhones) out of the slightly more than 1 billion iPhones estimated to currently be in use were in the hands of the non-original owner.

      This number is likely to rise in the years ahead as the replacement cycle for iPhones has lengthened. It’s possible for the installed base of iPhone users to rise at double-digit rates even if new iPhone sales remain static or continue to slightly decline.

      1
      December 6, 2018

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