Will Apple’s Weak iPhone Sales Remain Short-Lived?

The Blowback of Falling iPhone Demand for Qorvo, Cirrus—and Apple

(Continued from Prior Part)

Gauging the smartphone market trend in January 2016

So far in this series, we’ve discussed how Apple’s (AAPL) audio products supplier, Cirrus Logic, and antenna switch supplier, Qorvo (QRVO), have taken a hit as the mobile device maker slowed its iPhone production volumes to control rising inventories worldwide. But is this trend short-lived or prolonged? Is Apple the only smartphone vendor facing weaker sales, or does this represent a larger, industry-wide trend?

According to GfK, total smartphone shipments are expected to have grown by 7% to about 1.3 billion units in 2015 and by 8% to about 1.4 billion units in 2016.

Emergence of Chinese vendors

TrendForce noted that in the first two quarters of 2015, Apple’s market share fell from 20.5% in 1Q15 to 16.40% in 2Q15, whereas Samsung Electronics’ (SSNLF) share remained unchanged at 26.8%. Meanwhile, Chinese vendors reported stronger performances, with Huawei’s and Xiaomi’s combined shares increasing from 12.3% in 1Q15 to 13.7% in 2Q15.

According to TrendForce, such Chinese vendors are expected to have accounted for 41% of the global smartphone shipments in calendar 2015. They are growing better than the global average as they are providing high-end smartphones at lower prices. This, of course, reduces the profit margin in the smartphone market, although it is unlikely to impact Apple’s margins.

TrendForce expects iPhone shipments to increase by 12.5% YoY (year-over-year) to about 260 million units, which would represent a market share of 18.5%. Samsung, on the other hand, could see Chinese vendors eat up 4% of its market share, reducing its share to 22% in 2016.

What does this market trend mean for mobile semiconductor suppliers?

In its most recent earnings, Qualcomm (QCOM) reported a shift in product mix away from high-end phones to mid- and low-end phones. The company recently entered into a licensing deal with China’s top four phone manufacturers—Huawei, ZTE, Huizhou TCL, and Xiaomi. Apple suppliers like Cirrus Logic, which depends largely on Apple for its revenue, could broaden their customer base by targeting such Chinese smartphone vendors, but the major challenge for the supplier would be to develop high-performance chips at reduced costs.

If we look at the overall smartphone market, Apple’s dominance is likely to be maintained, which indicates that the current demand weakness would be short-lived. You can gain exposure Apple stock without investing directly in the company’s stock by investing in the iShares Core S&P 500 ETF (IVV), which has close to 3% exposure in electronic equipment. It has almost 3.2% exposure to AAPL.

For more analysis, check out Market Realist’s Mobile Devices page.

Browse this series on Market Realist:

• Part 1 - Why Qorvo and Cirrus Logic Lowered Their Revenue Guidance for Fiscal 3Q16

• Part 2 - Qorvo Expects to Witness Weak Sales in Fiscal 2H16

• Part 3 - Why Qorvo May Still Look Good despite Weak Guidance