Disappointing results from Apple hint at global smartphone fatigue

Fatigue may be hitting the global smartphone market, as Apple's era of unstoppable sales growth appears to be coming to an end. Although the electronics giant has expanded into other areas, its fortunes are still closely tied to the iPhone, which is responsible for two-thirds of its sales and most of its profit. Disappointing results from Apple today will reaffirm beliefs that we are suffering from phone fatigue and new phones no longer excite us. Indeed, some experts believe that smartphones will be replaced by artificial intelligence in the next five years.

Apple is expected to report its slowest-ever iPhone sales growth on Tuesday, when it announces its earnings for the first quarter of its 2015/16 financial year.

Analyst estimates suggest that year-on-year growth in iPhone sales will come in at just over 1%. That’s a far cry from this time in 2015, when the iPhone grew 46% year-on-year.

Although the iPhones 6S boasted record weekend sales when they launched in September, their record-breaking streak hasn’t lasted, and they now look likely to sell in similar numbers as their popular predecessors – which would be a still-astronomical 74.5m units.

The reason for the slowdown in growth is unclear. Some analysts attribute the stagnant demand to the fact that the newest iPhones have fewer distinguishing features than their popular predecessors, causing some proportion of buyers to skip a generation in the hope of a more substantial upgrade with the iPhone 7, expected to arrive in September 2016.

Others point to the general slowdown in smartphone sales worldwide. Gartner figures from August show that worldwide smartphone in the second quarter of 2015 hit 329m, up from 290m the same quarter in 2014. That increase of 13.5% year on year was the slowest growth rate since 2013, Gartner reported.

The iPhones 6 also received a particular boost from being the company’s first over-sized phones, tempting some switchers from Android, particularly in Asia, who had previously lapped up phablets from players such as Samsung Electronics.

“Apple has become a victim of its own success as the blockbuster iPhone 6 product cycle was hard to replicate with many customers either buying an older, cheaper iPhone 6 or waiting for the iPhone 7,” FBR Capital Markets analyst Daniel Ives said.

China, the company’s fastest-growing market, may also have weighed on first-quarter results, as a slowdown in the country’s economy forced consumers to tighten their purse strings.

To make matters worse, Apple is expected to forecast a drop in iPhone sales for the second quarter of its 2015/16 financial year - the first time that sales will fall since the iPhone was launched in 2007.

This was foreshadowed by disappointing second-quarter forecasts from the company’s Asian suppliers such as TSMC and Largan Precision Co.

Analysts said the company will have to wait until the launch of the iPhone 7 to return to growth, as buyers upgrade to the latest version. But despite not actually existing yet, that phone is already causing controversy thanks to a rumour that the company will not include a 3.5mm headphone jack on the device, forcing customers to switch to wireless headphones or iPhone-only headphones using the proprietary lightning.

Alongside the rumours about the iPhone 7, other users are holding out for a hypothetical smaller iPhone, repurposing the 4-inch screen from the iPhones 5 with some of the faster internals from the iPhones 6. The new phone, which is said to be called the “iPhone 5se”, would fit two niches at once, serving both those users who currently buy budget devices such as the iPhone 5c, and those for whom the iPhones 6 are too large for comfortable use.

Apple shares closed down 1.98% at $99.41 on Monday. They have fallen nearly 10% since the start of October, steeper than a 2.2% decline in the S&P 500 index.

Out of the 50 brokerages that cover Apple, 43 have a “buy” or higher rating on the stock. Their median 12-month price target is $141.50. According to the Wall Street Journal, the company is currently trading at an 8.1x multiple of forward earnings, lower than almost every one of its competitors: Microsoft is at 17.0x, Google at 20.7x, and Facebook at 37.4x.