Smartphones Still A Good Call

10/8/2012


The smartphone has graduated. It's no longer just a niche gadget, but a powerful tool many consumers cannot, will not, live without.

While that's a strong statement, Americans' spending habits back it up. From 2007 through 2011, household spending on telephone services rose nearly 11%. Total household spending rose slightly over the four-year period but would have declined without the gain in phone expenditures.

MARKET-SHARE TRENDS IN SMARTPHONES
Over the last two years, Google ($757; GOOG) and Apple ($661; APPL) have captured larger shares of the smartphone operating-system market, with most of the gains coming at the expense of BlackBerry maker Research In Motion ($8; RIMM) and Microsoft ($30; MSFT).
-------- 2010 --------
-------------- 2011 --------------
-------- 2012 --------
Company
June
(%)
Sept.
(%)
Dec,
(%)
Mar.
(%)
June
(%)
Sept.
(%)
Dec.
(%)
Mar.
(%)
June
(%)
July
(%)
Google
14.9
21.4
28.7
34.7
40.1
44.8
47.3
51.0
51.6
52.2
Apple
24.3
24.3
25.0
25.5
26.6
27.4
29.6
30.7
32.4
33.4
Research In Motion
40.1
37.3
31.6
27.1
23.4
18.9
16.0
12.3
10.7
9.5
Microsoft
12.8
9.9
8.4
7.5
5.8
5.6
4.7
3.9
3.8
3.6
Other
3.2
2.9
2.6
2.9
2.1
1.5
1.0
0.7
0.6
0.5
Symbian/Palm
4.7
4.2
3.7
2.3
2.0
1.8
1.4
1.4
0.9
0.8
Source: comScore.

At a time when nine out of 10 adults in the U.S. already own a mobile phone, some worry that growth in this market is tapped out. We aren't ready to make that call, for at least three reasons:

Demand for data: According to research firm eMarketer, the average American spent 65 minutes a day on mobile devices last year, more than double the time spent just three years ago. Data from researcher comScore shows that in July, more than 51% of mobile-phone users browsed the web on their phones, up from 30% in December 2009. The percentage of phone users who listened to music on their phones more than doubled to 28% from 13% in December 2009. Such usage trends, coupled with the stubbornly persistent rise in U.S. consumers' spending on phone service, suggests the thirst for instant data access is far from quenched.

Room for expansion: More than half of U.S. mobile-phone users now carry smartphones, but the percentage is far lower in most of the rest of the world. IDC, a market research provider, estimates smartphone shipments will rise 33% to 660 million units this year, then nearly double to 1.16 billion units in 2016, an annualized growth rate of 15% over the four-year period.

New revenue streams: The mobile advertising business is still in its infancy. MagnaGlobal projects a 50% rise in mobile advertising spending to $6.3 billion in 2012 — accounting for 6.5% of internet advertising and just 1.3% of total ad spending. The research firm forecasts 27% annual growth to $20.9 billion in 2017, which should still account for only about 12% of internet advertising. Given the proliferation of mobile devices, over time mobile advertising could account for an even larger piece of the pie.

What does all this mean? Investors should not be afraid to invest in Focus List Buys Apple ($661; AAPL) and Google ($757; GOOG), which combine to control about 85% of the global smartphone market. Both companies do a lot more than provide operating systems for smartphones, but the proliferation of the devices is key to their long-term plans.

The consensus projects five-year annual profit growth of 15% for Google and 23% for Apple — targets that sound aggressive, but not unreachable given the likely expansion of smartphone usage and mobile advertising. Both stocks trade at substantial discounts to historical valuation ratios and seem attractively valued relative to their growth potential.

We cover two other players in the smartphone market:

Microsoft ($30; MSFT) powers fewer than 4% of the world's smartphones. But devices using Windows Phone 8, the mobile version of Microsoft's latest operating system, are expected to hit the market in November. If Windows Phone 8 catches on, the smartphone unit could potentially become a growth kicker. Microsoft, reviewed in more depth in Portfolio Review, is rated Buy and Long-Term Buy.


Research In Motion ($8; RIMM) still controls nearly 10% of the global smartphone market, but just two years ago it was the biggest player in the pool, with a 40% share. The stock jumped last week on a smaller-than-expected loss, but don't buy on the news. Smartphone shipments in the August quarter were down 30% year-over-year. RIM is rated C, or below average.


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