I remember my first smartphone.
It was an Apple iPhone 3G that I purchased back in 2009.
When I got it, I thought I was the most tech-savvy person on the planet.
It blew my mind what this device could do compared to my previous flip phone. Gone were the days of punching in numbers just to send a text (four 7s to make an “s” … two 3s to make an “e” and so on).
Not to mention the massive catalog of apps now at my fingertips. The potential seemed limitless.
I wasn’t one of the millions who stood in line for hours to get my iPhone on launch day.
To this day, I’ve never bought a phone on the day it’s released … and I never will. Phones are just too expensive when they first come out now.
And I’m not the only one.
Smartphone Market Growth Is Stagnating
In 2009, the year I bought my first smartphone, I joined a community of 61.5 million Americans (roughly 20% of the population of that time) who owned this shiny new technology.
Fast-forward to 2020 and 296.8 million Americans owned a smartphone. That’s almost 90% of the population at that time!
In just 11 years, the number of smartphone users in the U.S. expanded by a staggering 382.6%.
But looking ahead, the trend line is telling:
Marketing firms eMarketer and Statista project the number of smartphone users in the U.S. will reach 364.2 million by 2040.
That’s only 22% expected total growth in two decades.
This tells me that the smartphone market is stagnating, and last year was indicative of this trend.
2022: The Worst Year (So Far) for Smartphones
In the fourth quarter of 2022, global smartphone shipments dropped 21% on a year-over-year basis, according to S&P Global Market Intelligence.
This was the largest drop for any quarter since 2013. And you can see the falling trend line in the chart below:
For the entire year, shipments are estimated to fall 12.4%.
Supply chain issues are part of it. Getting things from COVID-wrecked China to the U.S. is the hardest it’s ever been (I’ll dive into this in a moment).
But smartphone retailers did something that, I believe, is creating a bigger long-term issue with smartphone sales.
Sensing lower sales, smartphone retailers such as Samsung and Apple decided it was a good time to push higher-priced, 5G-capable phones over their less expensive counterparts to make up for decreased demand.
The result was a 7% jump in the estimated average price to $336 last year. That’s 26% higher than the average price in 2019!
The problem is now, in an inflationary economy, we are cutting back our discretionary spending. We’re spending our hard-earned money on what we need, not what we want.
Not to mention many people (including myself) are content with whatever model they are currently using. Jumping from an iPhone 9 to an iPhone 13 doesn’t come with the same wow factor of replacing your old flip phone with a fancy new device.
This is part of the issue. The other … supply chain woes.
China’s Role in the Smartphone Production Crash
It’s likely that the smartphone you have in your hand was manufactured in China … or at least a large part of it.
Technology research company Canalys estimated that 70% of smartphones shipped in the U.S. were made in China in 2020.
That bit smartphone retailers right on the backside at the height of the COVID pandemic in 2020 as China locked down its economy to prevent the spread of the virus.
Last year, the country faced the same thing … a surge of COVID infections that not only shut plants back down but also impacted consumer spending in the largest market in the world.
As you can see from the chart above, of the five largest smartphone suppliers in the world, only Apple increased its global shipments in the fourth quarter of 2022.
Samsung, Xiaomi Corp., Oppo Mobile and Vivo Communication shipments all declined over the year.
And a significant drop in consumer spending in China — where those four companies’ phones are extremely popular — drove those declines even lower.
What's Next for the Smartphone Market
The technology sector soared out of the COVID crash. The Technology Select Sector SPDR Fund (NYSE: XLK) gained more than 147% from March 2020 to December 2021!
But tech stocks have pared back since then … XLK is now down 20% off that high.
I took a deeper dive and examined the iShares Exponential Technologies ETF (Nasdaq: XT).
This exchange-traded fund (ETF) holds more than 200 stocks related to exponential technology — tech that significantly increases in capability over a short time. Some of these companies are right in the thick of smartphone manufacturing.
It holds companies like:
- BlackBerry Ltd. (NYSE: BB).
- NVIDIA Corp. (Nasdaq: NVDA).
- Qualcomm Inc. (Nasdaq: QCOM).
I ran an “X-ray” of this ETF where I put all of the holdings through our Stock Power Ratings system and came up with interesting results.
The average rating of all stocks listed was 36. That means we are “Bearish” and expect those stocks to underperform the broader market over the next 12 months.
For reference, QCOM scored a 38, NVDA scored a 36 and BB scored a 9.
While this fund doesn't hold Apple Inc. (Nasdaq: AAPL) stock, it's in almost the same spot with the Bearish 40.
When you look at slumping deliveries, continued supply chain woes and poor scores on our Stock Power Ratings system, it’s best to steer clear of investing in smartphone manufacturers and technology.
Bottom line: Until we see these manufacturers put a stronger focus on lower-cost models, or they release a model that innovates at the same level as when the first iPhone came out, we shouldn’t expect a repeat performance on growth from the smartphone market.
Stay Tuned: This Oil and Gas Co. Services an Expensive Region
Remember: We publish Stock Power Daily five days a week to give you access to the top companies that our proprietary Stock Power Ratings identify!
Stay tuned for our Monday issue when I give you all the details on an oil and gas transporter that is focused on an expensive region of the U.S.
It rates a “Strong Bullish” 95 out of 100!
Matt Clark, CMSA®
Chief Research Analyst, Money & Markets
P.S. Tell us what you think about smartphones. Are you investing in this technology? What is driving your decision? Email us at StockPower@MoneyandMarkets.com and let us know!