Invest In the Mobile Industry
Callum is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Smartphone growth has been huge over the years, with the latest data showing a 45.3% increase in smartphone sales (on a quarterly basis) from Q3 2011 to Q3 2012 (123.7 million units to 179.7 million units) according to IDC. The IDC predicts over 1 billion smartphones will be shipped by 2016, which would be a sharp increase from the 491.4 million units sold in 2011. In the US, there still is plenty of space for growth in smartphone sales. According to Nielsen 54.9% of the US mobile phone owning population owns a smartphone, with 2 out of 3 new mobile customers getting a smartphone. In the UK, there is a similar story, where about half the population has a smartphone. That means relatively soon the other half will catch up in both countries and the vast majority of cell phone users will own a smartphone in a few years. This is a great sector to get into, but some of the best players can get overshadowed by companies like Apple (NASDAQ: AAPL) or Google (NASDAQ: GOOG). While both Apple and Google are great investments and will benefit from the continued switch to smartphones in Europe and the US, some of the other players can be hidden from the public's eye.
A Hidden Giant
Qualcomm (NASDAQ: QCOM) is a major player in the semiconductor world, making anything from Apple's 4G LTE processor and power management system to its Snapdragon S4 processor that is used in devices like HTC's Desire X. It is all over the smartphone map; both in the production of the semiconductors and in owning the intellectual property (patents) that have to do with smartphones. Qualcomm owns the patents for almost all of the 3G technology and it also has patents on its CDMA technology. It also owns patents on 4G technology as well. This means that for every smartphone sold that uses its patents, Qualcomm gets 4-5% of the total sale price. If smartphones are selling for $600, then Qualcomm gets $30 a phone. While its 4G patent portfolio isn't as strong as its 3G one, it still has a strong foothold in this area. It's dominance in the 3G and CDMA area is very important to keep a note on. While developed markets are moving into the 4G LTE space, developing markets are just starting to set up 3G networks. While the selling price of those smartphones will be lower, the massive increase in volume will more than make up for the lower selling price. Qualcomm currently has $12.37 billion cash on hand with no debt. On the manufacturing side, Qualcomm has tons to gain, as more smartphone's sold means more chips need to be made and sold. And Qualcomm, being the one of the largest semiconductor manufacturers in the world, will happily oblige. I'm bullish on Qualcomm.
The New Wallet Maker
Broadcom (NASDAQ: BRCM) is another major semiconductor manufacturer. Broadcom makes things like routers, mobile baseband chips, and NFC chips. The interesting part is the NFC, or near field communication, chips. NFC chips allow phones to transfer data to any other phone with a NFC chip (like the Samsung Galaxy S3) or a device like a credit card scanner. The idea is that eventually everyone will have their credit and debit card on their phone, and some phone makers like Nokia, HTC, and Samsung are already taking advantage of this. The iPhone 5 doesn't have an NFC chip, but one could speculate if this starts to catch on the next version will. Samsung (which runs on Google's Android) has been advertising its NFC capabilities on most major television networks. While it is too early to see if NFC chips will turn into the new wallets, many are bullish on the concept. Personally I think that we are moving to a paperless/plastic-less world, where everything will be done the simplest way possible. As we move into this world, NFC chips will become very important because you can transfer anything seamlessly onto another device. Broadcom is a good company that trades at the higher end of the PE range. But this is a company that has grown its EPS by over 20% annually over the past 5 years and is expected to keep up this double digit growth rate (10-15%) for the foreseeable future. I'm bullish on Broadcom's long term potential, but think that in the short term its stock will continue to trade sideways.
Everyone pays a lot of attention to who is winning and who is losing the smartphone operating system battle, but there are the hidden players in the back that don't get as much attention but are still good buys. Qualcomm and Broadcom both offer great ways to play the entire mobile phone industry without having to stack all your cards on one phone maker or operating system. This way you can sleep easy at night while your investment grows along with the booming smartphone market. Even if Google beats Apple or Apple beats Google, if Microsoft and Research In Motion become relevant, if Nokia goes bankrupt, you still win because you bet on the entire sector and the entire smartphone industry is growing like gangbusters right now.
callumturcan has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Google, and Qualcomm. Motley Fool newsletter services recommend 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!