Another one of Apple's historic strengths is going away.
Apple is hitting a wall in China, UBS analyst Steven Milunovich wrote in note to clients.
The iPhone maker's presence in China peaked in 2015, and it has been downhill from there. "In 2015 the move to 4G and the new iPhone 6/6 Plus form factors drove significant growth for Apple at the expense of Samsung," Milunovich wrote. "We now expect flat China units and little long-term growth," he said.
Apple's historical peak in China was in 2015, when the country represented 25% of iPhone shipments. But its market share has since fallen to 19%, Milunovich said.
Milunovich pins the slowdown on two core explanations.
First, local competition is on the rise at the high-end of the market. "Local competition from Huawei at the high end and others at the 6s level limit share gains," the note said.
While Apple remains competitive in the higher-end portions of the market, Milunovich pointed out that even Apple's share of that sliver of the market is dwindling. As the iPhone gets pricier, fewer people can afford the device, Milunovich said.
"At the peak in 2015, we believe Apple likely had 40-50% share with Tier 1 and 2 consumers; we think that figure is closer to 20-30% today." That leaves Apple with a total addressable market of roughly 150 to 220 million people of the 300 million Tier 1 and 2 consumers.
Here's a look at what that piece of the pie looks like for Apple:
Secondly, the lower end of the market isn't any better for Apple.
Apple is distributing less, and its product is simply becoming outdated in relation to its competition. "Apple success in Tier 3-4 cities is unlikely due to weak distribution and old features at lower price points," Milunovich said. "We see little chance of Apple penetrating Tier 3-4 cities despite its lower-priced offerings because competitors have many more distributors and promoters, older iPhones lack newer features, and iPhone batteries are smaller," he added.
Here is a graphic of heightened smartphone competition in China, pressuring Apple:
Additionally, a slowing smartphone market at large isn't helping Apple's case. "The market as a whole has begun to slow due to saturation and lengthening upgrade cycles," the note said.
As its device sales slow, which Morgan Stanley pointed out in a note in March, the company is turning to its services business to realize upside. "We see increasing value in the Apple platform, particularly through services monetization," Morgan Stanley analyst Katy L. Huberty wrote.
Apple is up almost 2% on the year.