As regular readers of this column know, I try to offer perspective and insight on investing and the economy. From time to time, I have mixed in several thematic perspectives, interviews and some other things to round out the economic and industry commentary.
Well, it would seem that my past as someone who has focused on the mobile phone industry has caught up with me, as one reader e-mailed me the following question: “Chris, how should we think about investing in the smartphone space? Clearly there is a shift toward these devices and away from simple mobile phones but with so many companies offering their own twist on the smartphone, how should we think about it?”
My first thought was while that may be a question written in just over 40 words, the answer encompasses several aspects. My second thought gets back to a view that I have had for some time — “buy the bullets, not the gun,” or more clearly stated, seek out those suppliers that are best positioned to capitalize on the trend, particularly as the trend begins to mature.
A few years ago, the smartphone market was far smaller than it is today, but, per International Data Corp., overall smartphone shipments in third quarter 2010 surged 89.5 percent year over year to 81.1 million units versus 42.8 million units in the year ago quarter. Nielsen & Co. recently reported that at the end of third quarter 2010, 28 percent of mobile subscribers now have smartphones, which compares to 14 percent at the end of 2008. Moreover, Nielsen’s findings reveal that in the past six months, 41 percent of new cell-phone purchases have been smartphones. Clearly, the mobile-phone industry is skewing toward smartphones in the domestic market and the trend is picking up outside the U.S. as well.
That growing trend has attracted the attention of a number of companies, some of which are entering the smartphone space while others were leaders in the mobile-phone market of yore and are left wanting. Market share leaders today in the smartphone space include Apple Inc., Research in Motion Ltd., and HTC. By comparison, those companies that have dominated the larger mobile-phone market — Nokia Corp., Motorola Inc., Samsung and LG — were caught asleep. Lumbering giants are fine when asleep but when they stir, as these mobile-phone players have, watch out. Motorola and Samsung have already released a slew of models between them with more on the way from not only these two but also LG, Sony Ericsson, Dell Inc., Hewlett-Packard Co. and others.
Arguably, mobile phones are a competitive market and smartphones even more so. That said, I suspect that over time the smartphone space will ultimately consolidate around a handful of manufacturers, much the way the PC industry and others, including the larger mobile-phone market, have evolved. Using history as a guide, I can say that early market share leaders are not necessarily long term market share leaders.
History often is doomed to repeat itself, and I strongly suspect that after a period of explosive growth, the smartphone space will begin to consolidate as the global smartphone market matures. Another factor that will eventually lead to consolidation will be operating margin pressure, which may result from companies aiming to tap into lower price point markets to stimulate incremental smartphone growth. Another factor that may hasten margin compression could be a price war among manufacturers.
Rather than choose one particular smartphone vendor, one could buy a basket of them or instead delve a layer or two deeper into the food chain to identify companies that are benefiting from this shift toward smartphones and serve a number of those companies vending smartphones. One such group is those companies that manufacture radio frequency (RF) semiconductors or, in more plain English, chips that are designed specifically for wireless communications or data transmission applications. These companies are well positioned for a number of reasons, all of which lead to them growing their dollar content per device and thereby positioning them to increase their revenues and potentially their profits faster than mobile-phone industry shipment growth. And that is where we as investors want to be.
Consider that current smartphones have several frequency bands along with GPS, Bluetooth and Wi-Fi capabilities, all of which require far more RF chips than what is found in a voice centric mobile phone. As the industry shifts more toward smartphones, all things being equal bode well for RF chip-set companies. This speaks nothing of another growing trend — cellular connectivity and these other capabilities finding themselves in other devices, such as Apple’s iPad and similar competitor offerings. With several new competing products slated to reach retail shelves in the coming weeks, pads and tablets are another revenue driver for these companies.
Who are some of these companies? RF Micro Devices Inc., Skyworks Solutions Inc., TriQuint Semiconductor and Anadigics, Inc. are some and there are more out there. The shares of some of these companies have had magnificent runs in the past few months, so be sure to do your homework first before investing.
• Chris Versace, the thematic investor, is director of research at Think 20/20, an independent equity research and corporate-access firm in the Washington, D.C., area. He can be reached at email@example.com. At the time of publication, Mr. Versace had no positions in companies mentioned. However, positions can change.
Chris Versace, the “Thematic Investor,” is the director of research at Think 20/20, an independent equity research and corporate access firm located in the Washington, D.C. area. Before Think 20/20, Mr. Versace was the portfolio manager of Agile Capital Management (ACM), a thematically driven alternative investment fund. The groundwork for ACM was laid during Mr. Versace’s tenure as senior vice president of equity ...
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