Smartphone growth is fading, but you can still make money in mobile

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The smartphone market has abruptly levelled off this year, bringing at least a temporary end to the meteoric growth that began in earnest when Apple introduced the first iPhone nearly a decade ago.

With the era of double-digit growth seemingly at an end, investors will need to be more selective in their exposure to the sector.

But there are still opportunities to make money off a technology that remains globally transformational.

This year, total worldwide smartphone shipments are expected to grow at a single-digit pace for the first time. Research firm IDC forecasts a total of 1.5 billion units will be shipped in 2016, up by 1.6 per cent over 2015. Last year topped the 10-per-cent mark. Growth peaked in 2010, when sales soared by more than 70 per cent.

"From a technological standpoint, smartphone innovation seems to be in a lull as consumers are becoming increasingly comfortable with 'good enough' smartphones," Jitesh Ubrani, senior research analyst with IDC, said in a report earlier this month.

Certain markets have become saturated, while customers are hanging on longer to their existing devices.

More broadly, smartphone sales are still expected to grow steadily. IDC expects shipments of 1.8 billion units in 2020, which represents a five-year compound annual growth rate of 4.1 per cent.

By drilling down further into the sector, investors can still find pockets of runaway growth.

"Demand for wireless data continues to skyrocket, with no end in sight, driven by the adoption of streaming media and cloud-based services across consumer and enterprise applications," David Aldrich, chief executive officer of semiconductor company Skyworks Solutions Inc., said in an earnings call earlier this year.

There are two broad categories for investors to consider when seeking smartphone exposure.

Handset companies

It's difficult to overstate the dominance of Apple Inc.

"Although smartphone growth has been sluggish in 2016, particularly at the high end, Apple remains our best investment idea in the smartphone space as they capture the vast majority of the industry's profits," said Brian Colello, director of technology, media and telecom equity research for Morningstar.

Apple captured 75 per cent of all of the profits generated by smartphone sales worldwide in the second quarter. Of the dozens of other handset companies out there, Samsung is the only competitor that generates any real profit.

Apple's latest share of the sector's overall profit has actually declined, from 84 per cent in the first quarter and 91 per cent in the second quarter of 2015, said Michael Walkley, an analyst at Canaccord Genuity. But then came the launch of the iPhone 7, which has reinforced the loyalty of Apple faithful. By contrast, Samsung has been rattled by the mass recall of its Galaxy Note 7 phones, owing to the risk of battery fires.

"Apple's first-mover advantage may be diminishing … as the smartphone market moves up the adoption curve and competition ramps up," Mr. Colello said. "However, Apple still has a good chance of both attracting new customers and retaining its existing premium customer base."

Component and software companies

As devices become more powerful and sophisticated, and as customers rely on their handsets for increasingly data-intensive uses, demand for components does not appear vulnerable to the same easing of demand for smartphones themselves.

And chip-maker stocks, specifically, arguably represent a more direct way to invest in the smartphone boom.

In particular, companies that manufacture radio-frequency (RF) chips, which support wireless transmissions, are accounting for an increasing share of the cost of the average smartphone.

The three principal publicly traded RF chip suppliers are Broadcom Ltd., Qorvo Inc., and Skyworks.

Mr. Walkley said all three are poised to "benefit from smartphone growth and the increasing mix of LTE in smartphones globally."