The Smart Way to Play the Mobile Revolution
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Investing to benefit from the mobile computing revolution is certainly an attractive idea -- these devices are becoming an integral part of our everyday life, and even replacing desktop computing in many ways. But investors need to do their research before choosing stocks in the sector; growth in mobile computing doesn't guarantee that each stock in the industry will be a winner, and some companies are better positioned than others for this exciting trend.
Samsung is the biggest manufacturer of smart phones around the planet, so it sounds like a logical candidate to benefit from growing demand in the years to come. The Korean manufacturer has widened its lead over Apple's (NASDAQ: AAPL) iPhone over the last months, as many iPhone customers hold back their purchases while waiting for the new iPhone model.
Samsung has a wider variety of products with different price ranges than Apple, so it will likely remain the leader in sales volume by capturing a bigger share of growth at the low end of the pricing segment. On the other hand, sales volume is not the same as profits, and if we compare Apple versus Samsung in terms of profitability, things look clearly different.
Though Apple made up only 6% of Q2 smartphone and tablet shipments, it accounted for 43% of revenues and 77% of operating profits, estimates Raymond James' Tavis McCourt. Just to have an idea about overall profitability levels, while Samsung has an operating margin below 11% of sales, Apple keeps more than 35% of the sale price as operating profit.
Besides, Apple has control over both the hardware and software of its products, while Samsung relies heavily of Google's (NASDAQ: GOOG) Android operating system to provide a reliable and accepted software platform for their products. Now that Google is venturing into the hardware business itself, Samsung could be in a complicated position if customers find a compelling alternative in an integrated product offering both software and hardware by Google.
But Google doesn't make any direct money from Android -- the software is free -- and Google is probably more focused on successfully adapting to the mobile paradigm than profiting from it in the middle term. The online search giant needs to secure a place for its search business and its gigantic platform of services -- Gmail, Maps, Chrome, etc. -- in the mobile space. Its efforts in this industry are yielding good results in terms of positioning, but I wouldn't expect much profitability for Google in mobile for the middle term, as the hardware business will probably have a negative effect on margins.
Amazon (NASDAQ: AMZN) is in a similar position. It has successfully introduced Kindle as a low-price alternative to the iPad, and the company is even reported to be testing its own smart phone. But Amazon seems to be getting into mobile to secure sales of eBooks and other digital products from its retail stores, since margins on the Kindle are admittedly razor thin, or perhaps even negative.
Amazon and Google are two companies adapting their businesses to mobile, but not precisely making tons of money from it like Apple is doing. While Samsung is a clear beneficiary from mobile growth, it doesn't have the same level of profitability or competitive strength that Apple has.
But this doesn't mean that Apple is the only direct alternative to benefit from growth in mobile, there are some interesting alternatives among companies delivering components and technologies for this industry.
“During the Gold Rush, most would-be miners lost money, but people who sold them picks, shovels, tents and blue-jeans (Levi Strauss) made a nice profit.” -- Peter Lynch
You don't need to invest in gold diggers. Buying the shovel producers may in fact be a better idea, and Qualcomm (NASDAQ: QCOM) is a smart alternative to capture growth opportunities in mobile via that strategy.
The company is a key provider of digital wireless telecommunications products and services based on its code division multiple access (CDMA) technology among other products and services. Qualcomm is strongly integrated into Apple's iPhone and iPad products as well as many Android-based devices, so it looks positioned for growth under different competitive scenarios.
The company has a strong positioning in the high-quality segment, and is widely expected to be one of the main beneficiaries from iPhone 5. High-end smart phones and tablets require more powerful -- and higher priced -- applications and processors from Qualcomm, and that bodes well for the company's profit margins. Among suppliers to the mobile computing industry, Qualcomm is one of the best positioned for growth over the years to come due to its close relationship with Apple and its competitive advantages when it comes to product quality.
The mobile revolution is going to be an exciting investment theme over the next years, but not every player in the industry is a good alternative to benefit from the trend toward mobile. Apple and Qualcomm are two interrelated companies that are positioned in the right spot to capture growth opportunities from mobile and translate them into profitability for their investors.
acardenal has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, Google, and Qualcomm. Motley Fool newsletter services recommend Amazon.com, Apple, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.