Smartphone Craze Roundup: Why These 2 Tech Stocks Are "Buys"

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

The smartphone craze has spread like wildfire across the world. In early November , comScore reported that smartphone penetration exceeded 50% for the first time ever. With increasing data use and 4G LTE coverage, the environment of both computing and web browsing is undergoing a massive overhaul. And whether the major players of desktop PCs like it or not, they will have to adapt and innovate in this new environment. Below, I provide my outlook on two leaders.

Google (NASDAQ: GOOG): Record Of Success Bodes Well For Future

Smartphones today, when they are bought, are chosen mostly by their manufacturer, but even more so by their operating system (OS). Every day, more and more Google Android devices are being activated, between 400,000 and 700,000, and they hold a significant percentage. Even still, Apple’s iOS has done a better job with commercialization. iOS’s share of the impression market is 63%, even though they only hold 15% of the smartphone market. Android is still number #2 though, and it's slowly increasing share. It holds a majority of smartphone sales, with a growth of 1750 bps y-o-y in the Q3.

As much as Google and Apple (NASDAQ: AAPL) battle each other for profits and shares, so do the users and developers of apps for Android and iOS. Google’s Android has because a bit of a charity, because Android app makers make only 2%-5% of how much iOS developers make. This has prevented Google from capturing more of the commercialized market in a Catch 22 situation: lack of app sales deter app developers, which prevents a viable marketplace in the first place.

Google still humorously preempted Apple’s Conference on the next iPhone with the announcement that around 500 Million Android devices were activated since 2008. It is expected that the shipments of 2013 will exceed the 1 billion mark, doubling the 2008 number. With this speed, Google will sell 2.5 times the amount of iPads and iPhones Apple sold in 2011. Despite the poor economy, Google’s growth is still in acceleration from 2006. But while upwards of 700,000 Android devices are activated each day, this rate is down from the previous number of 1.3 million a day. “Activation” refers to mobile owners that subscribe to a wireless plan or service like 3G or 4G. 

On a more optimistic note, Google is working with Motorola Mobility to push a new, highly secretive mobile phone, dubbed “X Phone”--which, according to news, will be state of the art and expensive, probably a direct competitor to Apple’s $650 contract-less iPhone 5 or future iPhones. 

November’s 2012 numbers forecast Apple having 53.3% of domestic market, and Google seeing it share decline by 1090 bps to 41.9%. In Europe though, Android has a share of 51%, which is more than double Apple's. Additionally, Android also holds 60% and 72.2% of Chinese and Brazilian markets, respectively. And, don't forget, Google is also in the tablet race, where its $99 Nexus tablet is picking up the market with 42.7% share in 2012.
When you compare Google to its main peer, Yahoo (NASDAQ: YHOO), it's hard to not be optimistic. Google trades at only 15.3x forward earnings versus 17.3x for Yahoo. The latter now trades at a 52-week high after rallying 39% from the lows. While Yahoo has seen a major corporate shakeup, it doesn't have anywhere near the kind of growth catalysts that Google has. For this reason, I also encourage backing Google as a way to bet on a market correction.

Microsoft (NASDAQ: MSFT): Still A Strong "Value Play"

Google’s application manager Clay Bavor said in an interview that his company would "invest and… go where the users are, but they are not on Windows Phone or Windows 8”. He went on to explicitly add that they do not plan to build apps for Microsoft’s platform. Even still, Windows Phone’s app number has passed the 150,000 mark and is slowly growing. They are also extending the store availability of Surface into non-Microsoft stores, possibly due to weak early sales.

China Mobile, the Chinese state-owned communications company, is also looking to sell 2 Windows Phone 8 models with help of the already-established Windows Phone and China Unicom partnership. Microsoft held only 3% of the Chinese smartphone market in the third quarter of 2012, so the room for penetration is strong.

Microsoft is also building 14 Indian innovation centers over four states, which will effect over 500,000 students and help drive demand (not to mention, local community support. And at only an 8.3x forward earnings multiple and a 10% free cash flow yield, Microsoft offers significant value with minimal risk. Eventually, the company's double-digit growth rate will catch up to the market and help shift investors away from Apple and into the world's leading operating system producer. Until then, it may be a rocky ride, but bear in mind that it's the long-term that matter.


TakeoverAnalyst has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services recommend Apple, Google, 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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