Unpacked for Friday, July 22nd, 2016

Don’t Freak Out About Latest IDC Smartwatch Numbers, Readjust Your Expectations – by Carolina Milanesi

This week, IDC reported its smartwatch sales figures and the news was that the segment has already registered a decline in sales. You can find the full release here.

The commentary I have seen around these numbers centered on the fact that the segment is clearly doomed because it is showing a year over year decline so early in the cycle. Such an analysis, however, fails to consider a few key points:

1) This is a very different market from smartphones. As I’ve said time and time again, smartwatches remain a “nice to have, not a must have” item. Because of this, we are still in an early adopter phase of the market which, by and large, has bought into it. While we wait for the mainstream consumer to come on board, sales will dip as the current installed base is waiting to replace and no significant amount of new buyers are added.

2) While the smartphone market saw a lot of development in the early stages, both of operating systems and apps, smartwatches have been moving slowly. While we have seen some OS improvements, mainly on watchOS, hardware has not changed much from where it kicked off and useful and dedicated apps have been hard to come by. This last point adds to smartwatches not being seen as a must have, as their role is mainly seen as a duplication of what one can do with a phone.

3) With Apple representing the vast majority of the installed base and so much expected to come out in the fall with the new version of watchOS and new hardware, it is natural people are waiting. The comparison with the iPhone would be a wrong one to make, as the Watch is not necessary and has no subsidy so people can and will wait for longer.

If you consider all of the above, the decline could have been expected. Long term, I still believe in this segment especially considering how much improvement will come with the next watchOS update. I also do not see any vendor threatening Apple’s lead in the market at least over the next year.

Entering the “Meh” Earnings Season – by Ben Bajarin
I find it apt to remember that stocks trade with a strong investor sentiment of future earnings. If a stock is down or investors are bearish, it means consensus is there is not a lot of future earnings potential in their view. This mindset tells us quite a bit. Look no further than Nintendo. Their stock is up thanks to Pokemon Go, even though revenues from this will be relatively limited given the revenue share agreements in place. However, investors are looking at the long-term potential for Nintendo to have an “a ha” moment and start moving from the Gameboy/Nintendo hardware generation to the mobile era. The stock is being traded on the future potential of earnings on IP like Mario Brothers, Donkey Kong, Legend of Zelda, etc., and Nintendo bringing those games in some new and unique ways to iOS and Android. One has to believe the time is close for Nintendo so it makes sense and could reap serious revenue for them.

Similarly, we see investor sentiment with Intel. Intel reported a beat yet their stock was down afterward. The Street does not feel there is much earnings potential ahead and thus the stock is viewed as a moderate to flat growth opportunity. Qualcomm on the other hand, despite their challenges, posted a beat and was trading up. As they solve their problems with IP licenses in China, they are still poised to see revenue gains from licensing even if the chipset business stays relatively flat. Investors clearly believe they will resolve the IP license issue and gain more revenue from their patents. Investors feel there is profit still to be had for the company.

Overall, this is a tough quarter, as summer is usually not the best time to be analyzing stock earnings. Summer is a bit of a lull from both an IT and consumer spending standpoint. But looking ahead, the fall will be quite interesting as it will help answer many questions in the world of the consumers.

Will Apple stay on track for negative or flat growth as many predict? If so, it implies a much slower upgrade cycle in their base overall which is going to be viewed as negative by investors. AT&T’s earnings seemed to hint in this direction — upgrade cycles are lengthening and this will have impact on many.

Will retail sales be down again this year as they were last year? US holiday retail sales were off more than a billion dollars YoY. Without any hot category to help drive sales, it may be more of the same this year.

Will tablet or PC sales rebound? Both of these categories remain in systemic decline as consumers remain content with the technology they have. I’m learning to accept this reality of the mainstream whenever we ask consumers if they plan to buy a PC, smartphone, or tablet in the next twelve months. The second most popular answer after “No” is “It depends”. If consumers are not inspired to get a new tablet or PC or their device lasts and is not broken, they largely choose to not upgrade. This is the hard and shocking reality of the mainstream most companies struggle to address.

From a hardware standpoint, I’m not sure I see anything on the horizon for 2016 that changes things and causes a big stir in the market. Which means companies like Facebook, Amazon, and others in the software and services side will continue to be the bright spots from a stock/future-looking perspective.

We never fully know until we see the hardware for the fall, but my analysis of many consumer tech hardware players is closely aligned with our studies who respond with “it depends” on what is released in the fall.

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Ben Bajarin

Ben Bajarin is a Principal Analyst and the head of primary research at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research and he is responsible for studying over 30 countries. Full Bio

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