Why Google is the Best Mobile Investment Right Now
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There's the cool, the under-appreciated, and then the dying. These roles in the communications business are filled by Apple (NASDAQ: AAPL), Google (NASDAQ: GOOG), and Research in Motion (NASDAQ: BBRY), respectively. In my view, Apple's iPhone is under considerably more pressure than consumers and the bulls would have you believe. On the other end of the extreme, Research in Motion's Blackberry is starting to suffer from a vicious cycle of losses, more marketing, and more losses, etc. In between lies an attractive value play: Google. I recently purchased my first smartphone that runs on the search engine's mobile operating system, Android. This catalyst appears to be significantly under-appreciated by the market.
During the second quarter, nearly two-thirds of all global smartphone sales ran Android. 23.5% of all phone sales, period, ran on Android. This compares to corresponding figures of 18.8% and 6.9% for Apple's iOS; 5.2% and 1.9% for RIM. Shipments of Android smartphones are more than quadruple those of iOS - yet all the rage seems to be centered on Apple and its iPhone.
Ultimately, none of these businesses would be classified as "communications" producers. However, they have diversified in the industry and are thus positioned to use it to generate cross-over revenue in the legacy business. Perhaps nowhere can this integration best be implemented than with Android.
As many are probably now aware, Android has a Google search bar that will not only help drive future ad revenue but also provide a platform to promote more products, like Google+. I personally have my Google+ account hooked up into my Android smartphone, and it automatically uploads new pictures onto my stream. This is something that neither Facebook nor Apple could replicate.
Well, I suppose Apple has done something similar with iTunes, but the result has been overly obnoxious in restraining user optionality. Apple's interest in building its own products and having consumers depend on those products has always made me feel that the tech firm was building a "cult." Unfortunately, this cult has leaked over into the investment community where shares are now unlikely to generate strong returns for recent shareholders.
What makes Apple so compelling to many investors is that it continues to trade at fairly low multiples despite being on one of the best growth curves in history. Never before has a company of its scale been able to not only chug along but to beat analyst expectations. Still, past performance is no indicator of future performance. Analysts are forecasting 19.6% annual EPS growth over the next 5 years, which would make Apple more than a $1.3 trillion dollar company by 2016. I do not believe that Apple is on that kind of growth curve. Although it may hold no debt and have an excellent balance sheet for accretive takeover activity or innovation, it has become apparent that there is very little the company can do from here that is as "bullet proof" as investors are now blindly expecting. Truth is, Apple is engaged in consumer electronics, which is driven by very, very fickle consumers. Preferences come and go, but Apple has not extended its reign in sustainable fields as much as Google has.
Through the Android mobile operating system, I am optimistic that Google will be able to boost free cash flow in the years ahead. Even more so than Apple, shares are unreasonably at a discount to the historical 5-year average PE multiple of 26.4x. Free cash flow has meanwhile taken off from $4.1 billion for the TTM ending 2Q08 to $12.8 billion in 2Q12. That's nearly a 33% CAGR over four years - a trend that has accelerated during 2011. Analysts recognize this value and rate the stock a "buy."
While Apple and Google seem to be building something great, RIM seems to be leaving something great. I believe that the company will eventually be taken over through patent sales; because, right now, the company lacks the financing necessary to capitalize on consumer demand for innovation. Analysts are rating the stock a 3.4 out of 5 and shares are now 70% below their 52-week low. Even still, the firm trades at 0.4x book value, which opens up the potential for a takeover artist to buy the assets and strip it for a profit.
With a valuation of just $3.9 billion, RIM is a very small target for some of the largest producers out there, like Microsoft and HP. The Blackberry is still a powerful brand, and Microsoft has recognized the value through signing a patent licensing deal that covers the mobile device maker's exFAT file system for flash memory devices. HP's CEO has expressed the need to offer a smartphone and, after the webOS fiasco, time is of the essence. Buying Blackberry and promoting the product to its large consumer population could revive both interests. All in all, while I believe RIM will be an asset sale play, it's not worth the risk right now - this investment will give you a whip lash if you decide to hold on as sales continue to plummet similar to recent levels. Instead, go where the upside and integration looks good: buy Google.
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