3 Persistent Values in the Smartphone Industry
Colin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
With some 722.5 million smartphones shipping in 2012, and shipments growing by nearly 33% in 2013, it's clear that smartphones are the communication technology of the future. While many investors are debating the prospects of Apple, Samsung, and Google, there are plenty of other stocks that stand to rise in the coming months as smartphones continue to become more popular.
In this article I will examine some of the component manufacturers who supply the necessary parts to build smartphones, and also a smartphone designer/manufacturer that could see large gains in the years to come. Component manufacturers are especially interesting as they could stand to record large gains, no matter which smartphone designer/manufacturer is winning the battle for market share.
The Gorilla In the Room: Corning Glass
Take Corning (NYSE: GLW), the maker of the famed Gorilla Glass now used in numerous smartphones. This high-strength glass can resist damage, but is also highly sensitive, thus allowing companies to build responsive touchscreens. Corning continues to invest in its glass technologies, having launched Gorilla Glass II in 2012 Gorilla Glass III in 2013. Each new iteration of glass has been thinner, more responsive, and more resistant to damage. The company is committed to further refining and improving its glass technologies in order to remain the leader in the field.
Further, while competitors are trying to launch competing glass types, Corning has a strong brand name and is trusted by both consumers and smartphone manufacturers alike. As smartphone sales continue to rise Corning should be able to tap into market growth. Gorilla Glass is the primary driver behind Corning's Specialty Materials sales, which have been growing substantially in recent years. In 2012, specialty materials made up over 1.4 billion dollars of Corning's total sales and 2011 saw net sales for specialty materials increase by 89 percent.
Fiscally, Corning is in great shape. Corning enjoys a profit margin of 22%, which is astounding in comparison to many other industrial companies. These high profit margins have been fueled by sales of Gorilla Glass, which enjoys profit margins of roughly 25 percent. Also, Corning's P/E ratio of only 12.34 doesn't fit into the normal mold of industrial companies, which regularly have P/E ratios in excess of 20. And with $5.78 billion cash in hand, vs only $2.98 billion in debt, Corning has the funds necessary to conduct research and expand operations.
Some might wonder if Gorilla Glass is really enough to drive the performance of a company as large as Corning. It's worth noting that Corning actually beat optimistic forecasts in the first quarter of 2013 and saw its stock prices jump by more than 5%.
Building Tomorrow's Chips Today: Qualcomm
Smartphones rely on powerful and energy-efficient chips. One chipmaker in a strong position to tap into the smartphone market is Qualcomm (NASDAQ: QCOM).
Qualcomm has been a good buy in the past, with a trailing P/E ratio of 17.09, but the company's forward P/E is projected to be 12.41. Compare this with rival chip maker AMD, which has been struggling in recent years and has a forward P/E of 88. Industry leader Intel enjoys a similar forward P/E of 11.85. Year-over-year revenue growth has surged to nearly 24%, and the company is enjoying a gross profit margin of 28.88%. With numbers like these, Qualcomm is certainly attractive on paper, but it's what the company is doing in the market that should make investors really excited.
Qualcomm already owns 43% of the smartphone chip market, and with the launch of its new Snapdragon 400 quad-core processor, the company is looking to make a big splash in the entry-level smartphone market. So far, Qualcomm has focused much of its resources on higher-end chips, but now the company is positioning itself for total market domination.
The company is also launching a Snapdragon 800 chip that promises to be one of the most powerful chips in the market, so they are certainly not giving ground on higher-end chips.
Qualcomm chips can currently be found in the Samsung S4, one of the world's most popular smartphones, and numerous other popular phones. There are even rumors swirling that Apple will begin using Qualcomm chips in future generations of phones. If so, that'd be a huge boost for the chip manufacturer. With numerous chips coming into the market and a strong brand name Qualcomm is in a great position to continue to dominate the smartphone chip market.
Down but Certainly Not Out: Sony
If you are looking to tap more directly into the growth of the smartphone market by investing in smartphone designers and manufacturers, there are some good value buys in the market. While stock prices for Samsung and Apple have arguably become inflated, other smartphone makers are looking like value buys.
One consumer electronics company that's worth a close look is Sony (NYSE: SNE). This diversified Japanese conglomerate has fallen on hard times as of late, watching its television segment and other consumer goods segments bleed market share. Accordingly, stock prices have plummeted, but the company appears to have bottomed out. Now, Sony has been making waves with its lineup of Xperia phones, and has secured highly favorable reviews from key websites and magazines. So far, the recently launched Xperia Z has been Sony's fastest selling phone and the company now expects to sell 42 million smartphones this year, compared to 33 million last year. Overall, Sony's Mobile Phone and Communications business has recorded strong growth, growing 102% in 2012 (yoy), and now accounts for a major portion of the company's revenues.
Sony's stock is quite cheap right now at about $22, for a total market cap of only $20 billion. In 2000, Sony had a marketcap exceeding 100 billion dollars, so it's easy to see how far the company has fallen. Still, Sony now looks like a good buy. The company actually has $19.36 billion cash in hand, though it also has $15.32 billion in debt. Profit margins have plummeted to only .64%, however, explaining the low market cap.
Still, with revenues in excess of $86 billion, and a forward P/E ratio of 14.88, the company appears to be good value. At the moment it appears that Sony's sales have bottomed out and are now stabilizing, with revenues now growing at 8.2%. Smartphone and other consumer electronic sales are rising and as the company works to restructure and consolidate its business operations, it should be able to increase profit margins.
Given its strong brand reputation, solid management, and increasingly competitive products, it is unlikely that Sony will slip much further. If anything, Sony should be able to use its well-reviewed smartphones to build momentum and lift the company's fortunes. Expect to see rising profit margins, along with rising revenues, in the months to come. This will raise stock prices and help the company complete its recovery.
Wrapping Up These Great Investments
All three of these stocks offer great opportunities to tap into the smartphone market. Corning and Qualcomm will be able to ride the success of popular smartphone manufacturers, such as Samsung, Apple, Sony, and others. These two companies are interesting investment opportunities because they are “above” the current battle for market share in the smartphone market.
Assuming Corning and Qualcomm remain preferred component suppliers, they should enjoy success regardless of which smartphone company is gaining the most market share. Sony, on the other hand, will have to battle with Samsung and Apple directly for market share, which is admittedly a daunting task. Still, given recent reviews of its phones and rising sales, the company appears to be in a position to do just that.
Colin Tweel has no position in any stocks mentioned. The Motley Fool recommends Corning. The Motley Fool owns shares of Corning and Qualcomm. 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!