March of the Smartphones
We tend to write about smartphones a lot of Fool.com, specifically regarding Research in Motion, Apple, and Nokia. In case anyone was wondering where the fascination on these handy little gadgets comes from, here's some interesting figures to consider:
http://online.wsj.com/article/SB124805149501664033.html (Subscription Required)
Estimates from Deutsche Bank say that Apple and RIM, while only controlling a 3% global market share last year, accounted for 35% of all cell phones operating profit.
As amazing as that figure looks, this year the two are expected to claim a 5% market share and 58% of total operating profits. While commoditized regular cell phones (Think that old RAZR phone you see people carrying around) sell at cutthroat prices, smartphones continue to sell at premium prices and grow market share.
The question becomes, who are these laggards that control most the market, but generate little to no return. Nokia manufactured 46% of industry phones and generated over 55% total operating profits last year. That leaves the rest of the industry (Motorola, Samsung, LG, and Sony Ericcson) controlling about 50% of market share and only generating 20% of all operating profits.
Although, you can probably add Nokia to the laggards pile at the end of this year, Apple and RIM’s increase in operating profits as a percent of the market will most likely come at their expense.
So, what’s the downside in all this? Notably, there’s fairly large growth assumptions built into these companies. Apple sells for about 27 times earnings and RIM sells for about 20. Nokia’s typically seen as the industry “value play,” but still sells for about 16 times earnings despite the struggles it faces.
Even with Apple and RIM moving towards preeminence, cell phones remain a very fluid and fast-moving field. Just years ago Motorola was a telecom darling, but failed to innovate and create a smartphone that had the same appeal as RIM or Apple. Today it trades for about a quarter those prices. The hope for Apple and RIM investors is that their phones have more unique capabilities that keep consumers tied to their products. Think about the difference between swapping out an old flip phone for a new one versus swapping out an iPhone for a different brand.
However, even with the increased brand loyalty, if the industry sees another shift like Intel and Nokia’s plans to build a platform that brings smartphones even closer to the capabilities of full-functioning computers, you could see some of the current high flyers left in the dust. Buyers beware.