These Winners from the Mobile Revolution are undervalued

Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The tech world has changed in a big way due to the mobile revolution, companies like Microsoft (NASDAQ: MSFT) and Intel (NASDAQ: INTC) are being left behind by players like Apple (NASDAQ: AAPL) and Google (NASDAQ: GOOG) which are better positioned when it comes to the mobile computing boom. Looking at valuation ratios, however, the transition has produced attractive entry prices for the winners of the mobile revolution.

The Fallen Empire

Microsoft and Intel used to rule the computing world with their famous WinTel - Windows Intel – duo for decades. But things have changed materially since then, computing has been shifting to mobile, and the PC market has experienced some serious difficulties. In fact, according to different industry sources, 2012 may be the first year of declining PC sales since 2001. Adding insult to injury, Macs have been gaining share versus Windows PCs too.

Intel has not been able to successfully enter the smartphone revolution, and ARM Holdings (NASDAQ: ARMH) is the prime beneficiary from this opportunity as it now owns 90% of the smartphone processor market according to estimates by the company´s management.

Under these circumstances, both Microsoft and Intel are trading at historically low valuation levels.  In spite of a healthy performance over the last decade, shares of these two tech titans are trading at deeply discounted P/E ratios, probably because investors are factoring in slower growth and some serious competitive challenges for these companies over the next years.

The Mobile Winners

According to IDC data for the third quarter, Google´s Android mobile operating system has a 75% market share in smartphones. This means the company is in a very strong position to benefit from the new trend, but at the same time Google is facing an important challenge when it comes to extending its profitability into desktop ads to the mobile world.

Google has been one of the most successful companies in the tech industry over the last decade, but the stock is still trading at a P/E ratio near 20. This is not dramatically cheap in comparison to other companies in the sector, but it does look attractively low from a historical perspective. Google is the undisputed leader in online advertising and Android provides a valuable venue to extend this leadership into mobile, so the current valuation looks conservative at least.

If we talk about opportunities from mobile computing, Apple is probably the most remarkable example to consider. The company has been one of the major innovators in the space, it’s making big profits from the iPhone, and the iPad, in its different versions, is a whole new product category which is still in its early growth stages.

However, Apple is currently trading at a P/E ratio near 12.5, which sounds almost ridiculously cheap from multiple angles. Even if growth slows down or if the company sees smaller margins from products like the iPad mini, the current P/E ratio at historical lows is exaggeratedly pessimistic for a healthy company delivering strong growth figures.

At current valuation levels, a dollar of earnings in Apple can be bought for less than a dollar of earnings in Microsoft, and that doesn't make any sense. Apple has disrupted different industries over the last decade, and the company is leading the way when it comes to the new tech paradigm. Microsoft, on the other hand, is trying to recover some of the lost ground and adapt to the mobile boom with its new Windows 8 and Surface tablet.

Bottom Line: Valuation Disconnect

Companies like Microsoft and Intel are historically cheap due to a changing tech paradigm and slowing growth expectations. They may still be interesting opportunities for contrarian investors, since the two companies have growth potential in different business areas and are financially solid. Investors may be exaggerating their negativity regarding these companies, but the mobile boom is a valid reason for concern.

On the other hand, Google and Apple - especially Apple - are offering very attractive valuation levels while being in the right position regarding mobile and other emerging trends. Investors have been quick to sell the losers from the mobile revolution, but there is still plenty of upside potential in winners like Apple and Google.


acardenal owns shares of Apple and Google. The Motley Fool owns shares of Apple, Google, Intel, and Microsoft. Motley Fool newsletter services recommend Apple, ARM Holdings, Google, Intel, and Microsoft. 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.

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