Which is the Best Smartphone Bet?

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

The last few years have been full of surprises in the smartphone market. The fall of Nokia (NYSE: NOK) and Research in Motion (NASDAQ: BBRY) was one of the most unexpected and disastrous affairs in the entire technology industry. When any stock loses almost all of its value, it can be said with surety that investors lost a lot of money--but when giants such as Nokia and RIMM fall, it is certain that the entire industry is going through a radical transformation.

The radical transformation in the smartphone industry has been the revolutionary iPhone and iOS. The two products were instrumental in annihilating the competition. The graph below nicely illustrates the effect of the iPhone on the entire industry. However, the quick demise of Nokia and RIMM suggests that this is a highly volatile industry and fortunes can change quicker than one can imagine. This is why almost every technology investor interested in the smartphone industry has the following question on their mind: How good are the turnaround prospects of Nokia and Research in Motion?

<img src="http://media.ycharts.com/charts/9c23b25acdf8911fd641ea9ebd000b77.png" />

data by YCharts

Research in Motion

In my previous article on Research in Motion, I explained why the stock is a good short candidate before the launch of the BB10. In last quarter’s earnings, the company beat consensus estimates and reported an EPS of $0.22 (adjusted). It was able to maintain its ASP and its subscriber base, which only declined by 1 million to 79 million. Despite these excellent results, the stock slid by 9% on earnings. The main reason behind this slide was RIM’s announcement that it planned to target low-end consumers by using a mix of different BB plans. This new strategy can significantly bring down the Average Revenue per Subscriber and was the main reason behind the post-earnings sell off.

The company's stock has appreciated significantly since then, due to positive feedback on BB10 and the new devices. According to the analysts the BB10 browser is faster than the Android or even the iOS. The devices are also being hailed as beautiful and sleek. The company plans to provide consumer with the experience of Android on a bug-free BB device, and the initial reviews show that RIM will be able to garner consumer interest with BB10. I believe the new devices are very exciting and they make a RIM a serious long term candidate. However, I also believe that this bullish run is on the hype of the BB10 launch, and RIM will shed value post launch.

Bottom-line

Research in Motion is all ready to make a comeback, but investors should keep in mind that there is tough competition in the smartphone industry. The market is already saturated with a number of different manufacturers. Apple’s iOS and Google’s Android are the market leaders in terms of operating systems, and both boast high customer satisfaction. Despite these established players, RIM will have to contend with the rising threat of Microsoft’s (NASDAQ: MSFT) Windows 8 OS boarded on Nokia’s Lumia. In their last earnings update, Nokia has reported impressive figures for their WP8-loaded Lumia. Although this is not conclusive proof that Lumia and WP8 have been a success, it does show that they have broken into this highly competitive market. It is also good news for Microsoft because the success of WP8 would also mean the success of Windows 8, and the company’s valuations are tied to the success of its latest touch-based operating system.

I believe both Nokia and RIM have a chance of gaining traction and turning around their fortunes. This is because carriers are tired of paying high subsidies to Apple, and also fear that Google might be looking to enter the telecom industry. A third player is an ideal power broker and carriers will root for the success of BB10 and Lumia. This ‘rooting’ is not only limited to moral support, but involves advertisement, shelf space, and subsidies. Therefore, carrier support can be a make or break a company in this highly competitive industry. 


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