Smartphones: A Fast Paced Market

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

The smartphone market has experienced the surge and the decline of several leading companies in the past few years. It is a very competitive market which demands constant innovation and is sensitive to customer’s satisfaction. It is essential to look at how a company is growing. In fact, I just read a good article that describes what to look for when analyzing these kind of businesses. The rise and fall of BlackBerry, formerly Research In Motion (NASDAQ: BBRY), is a clear example of this: the company had 14.3% of the smartphone market share in the fourth quarter of 2010, then its share declined to 8.2% in the fourth quarter of 2011 to be nowadays driven off the ranking chart.

Will the smaller mobile phone vendors survive?

BlackBerry is having a hard time trying to get back to its roots of being one of the leading smartphone manufacturers worldwide. The company hired JPMorgan and RBC to help it review its financial situation and analyze its business model back in 2012, but BlackBerry seems to have lost its compass.

The company’s stock price plunged more than 23% from June 24 to present date on its poor last quarter results. Although the firm posted a 9% increase in revenue at $3.1 billion for the first quarter of 2014 compared to the same quarter in 2013, it had a loss from continuing operations of $84 million. Moreover, revenue from the Latin American region dropped 6% which has rattled investors as that was the bulwark of BlackBerry's growth in the last quarters.

The company launched new phones to fight for some of the lost pie in the smartphone market, the models Z10 and Q10, and it is trying to regain the lost terrain in the corporate technology segment with its Blackberry enterprise server. As more and more mobile devices are used by employees to manage workload in emails and messaging, there is an opportunity for BlackBerry to gain a new revenue stream in the mobile device management sector.

The firm is a definite no for investors, as it will have to solve many issues to get back on the growth track after a series of failures including its PlayBook tablet.

Although Nokia’s (NYSE: NOK) stock price is far from being around its historic high, it has improved more than 75% in the last year. The company ranks second in the mobile phone market after Samsung with 14.8% market share, but does not appear in the smartphone segment ranking. However, the company is facing some pressures regarding its poor performance in the last year. Nokia posted a 22% decrease in net sales for 2012 compared to 2011 totaling €30.2 billion, and a 93% decline in operating profit that stood at €126 million for the same period of comparison. This was mainly given by a drop in almost all of its categories in its devices & services segment.

Nokia has been trying to turn the wheel towards growth with Microsoft’s support. Nokia agreed to using Microsoft’s operating system for its mobile devices, but that has not given fruitful profits yet. Some analysts were expecting an imminent acquisition of Nokia by Microsoft, but this is unclear as the Finnish firm is having trouble turning around its business. But investors should note that according to the Wall Street Journal, Nokia is the biggest exclusive seller of Windows phones, accounting for 79% of total Windows devices which means the companies depend on each other fiercely. Investors should weigh this acquisition option in if they wish to acquire Nokia shares and risk to a continued meager performance.

Believe it or not Apple (NASDAQ: AAPL) is another stock that has been punished by investors as its price declined about 31.5% from June 2012 to present date. Apple has 17.3% of the smartphone market according to IDC, but concerns have been raised as the company is a laggard regarding the release of new devices after the iPhone 5 did not meet customers’ expectations. Other competitors, such as HTC and Samsung, have released cheaper top-of-the-line smartphone devices earlier, and this has impacted iPhone’s sales that have not met analysts’ estimates. The company is trying to regain the top of the smartphone vendor ranking by changing its image, releasing new products and software, as it exhibited a thorough redesign of its iPhone operating system.

Apple remains to be a leading cash flow generating company. It posted $12.5 billion in cash flow from operations for its second quarter results of 2013 and ended with an astonishing cash balance of $145 billion. The company’s overall net sales improved 11% to $43.6 billion compared to the same quarter a year ago. But the company’s gross margin decreased almost 10% to 37.5% and its net income declined more than 17% totaling $9.5 billion from the second quarter of 2012 to the second quarter of 2013.

Apple’s stock price drop presents an opportunity to acquire a cash flow generating machine as it is trading at 9.4 times earning compared to the industry’s 11.4 multiple, and its PEG ratio is 0.7. Analysts’ data about the future 12 month price for Apple is estimated at a median price of $535 and it seems a good opportunity to enter at a current $396.

Final comment

From this peer group the most solid performance will be given by Apple by its tremendous amount of cash flow generation and then Nokia because its partnership with Microsoft could help the Finnish company get back on its feet. Some analysts are aware of a possible acquisition of Nokia by Microsoft if Nokia is able to turnaround its poor performance the last quarters. BlackBerry has disappointed again with its latest quarterly results as analysts were expecting increasing sales of its new devices. The company will have to do much better to match huge rival firms as Samsung and Apple but it is a start.

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Vanina Egea has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. 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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