Apple Inc.'s Best Days Could Be Behind It

Although Apple sold more iPhones than ever before last quarter, growth has all but vanished. In fact, Apple's North American business actually shrank. 

This problem isn't confined to Apple -- Samsung has also hit a wall. At least at the high end, the smartphone industry appears to be nearing total saturation. That's an obvious problem for Apple and Samsung, and major suppliers like Qualcomm .

Apple is an iPhone business, and that business is slowing
Apple's sell-off on Tuesday was largely prompted by the company's disappointing iPhone sales -- a figure of 51 million fell short of analyst expectations, and was up just 6.7% from the prior year.

Apple's North American iPhone business was particularly disappointing. Management blamed, among other factors, supply constraints -- it misjudged the (lack of) demand for the iPhone 5c. But it might just be that everyone in North America that wants an iPhone already has one, and they aren't in any rush to upgrade.

When Verizon reported earnings earlier this month, the carrier reported smartphone activations that came in worse than expected. Interestingly, Verizon didn't break out iPhone sales (something it had done in previous quarters) suggesting that they were particularly disappointing.

Samsung misses earnings estimates as growth stalls
Of course, Apple isn't the only company disappointing investors -- when Samsung reported earnings last week its results came in short of expectations, and the company's mobile division posted flat growth. At the time, some attributed Samsung's struggles to Apple taking share -- perhaps Samsung wasn't selling as many smartphones because Apple was doing so well. As we know now, that wasn't the case -- the market for smartphones is simply shrinking.

During Apple's earnings call, Sanford Bernstein's Toni Sacconaghi asked CEO Tim Cook about the iPhone's growth relative to the broader market -- the iPhone appeared to be growing slower than the smartphone industry as a whole.

"I would guess that the market numbers...will actually be decreased as the revisions come out," Cook said, suggesting that the smartphone market as a whole was seeing softening demand.

Qualcomm's business comes under pressure
If investors had been watching Qualcomm, they might have expected this trend. When the company, which supplies chips to most of Apple's competitors, posted earnings last November, shares fell following disappointing results, and Qualcomm cut its guidance for 2014. Qualcomm's CEO, Paul Jacobs, warned that the company's days of 30%+ growth were coming to an end. Qualcomm expected revenue to grow just 5%-11% in 2014.

To offset slowing growth, Qualcomm has been looking to new markets, most notably wearables: The company released a smartwatch, the Toq, late last year. Unfortunately, much like it Samsung's Galaxy Gear, it hasn't been well-received -- Ars Technica's Lee Hutchinson wrote that it "hasn't changed my general opinion about smart watches: They're still not awesome."

Looking to new frontiers
Hopefully Apple can do better. The so-called iWatch has been rumored for months, and it will need such a product, along with others, to reignite growth. Samsung is doing much the same, planning a second version of the Galaxy Gear, and branching out into larger tablets and other wearable devices.

It's possible that these devices could be as big as the iPhone, but without seeing them, it's impossible to say with any authority that they will be. It's far safer to assume that the iPhone was a once-in-a-generation product, and with the market seemingly saturated, Apple's best days could be behind it.

In that regard, Apple's below-market multiple seems well-justified, given that investors aren't likely to see much growth going forward. Investors might continue to like Apple for its capital return program, but the days of wild moves to the upside appear to be over.