How to Profit from This Emerging Tech Trend
Soroush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
They’re everywhere! No, I’m not referring to Chuck Taylors, I’m referring to smartphones like the iPhone, Galaxy S and Blackberries, among others. Nowadays, most people have one, and those who don’t want to have one eventually. The demand for smartphones is ever-increasing because it is slowly replacing functions that were once only available to personal computers. People are not just using them to make calls or texts anymore, they’re now being used to surf the internet, watch videos, listen to music, chat with friends, take pictures, play games, and a whole lot more.
According to market research firm IDC, global smartphone shipment volumes in 2011 were up 61.3%, thanks to Apple’s (NASDAQ: AAPL) iPhone 4S and the Samsung Galaxy SII. Data for the 4th quarter of 2011 reveals that Apple and Samsung sold 37 million and 36 million units respectively, effectively capturing 46.3% of the global smartphone market. IDC also said that it “fully expects continued double-digit growth for smartphone sales in the foreseeable future.”
A Growing Industry is a Goldmine
An industry that is growing like that definitely has great profit potential for both companies and investors. In the following section, I’d like to point out a few companies that will definitely be benefiting from the smartphone boom so that you can build up your list of potential stocks to buy. Keep in mind that I will only be focusing on leading companies that are growing their annual revenues by double digit figures, so I’ll leave out Nokia and Research in Motion for now.
Apple Inc. is the maker of the revolutionary iPhone. For Fiscal Year 2011, they sold a whopping $47 billion worth of iPhones, an almost 87% increase from the previous year. Apple and Samsung hold much of the market share for smartphones, so if you want to invest in a smartphone “pure play," Apple would be at the top of your mind. Here is a related article which analyzes the company in greater detail. To summarize, we like AAPL because it is currently trading at earnings (13.9X) and cash flow (10.1X) multiples below its own 5-year historical averages, despite showing superior EPS (116.8%) and free cash (132.8%) growth post-recession. Additionally, the company is making headway in China, where its smartphone market share jumped from 8% to 19% with the release of the iPhone 4S earlier this year. Going forward, the company is in talks with China Mobile to provide iPhones to the carrier's 660 million subscribers.
Samsung would’ve been a great candidate for our list; however, the South Korean multinational conglomerate doesn’t have an ADR that trades in the US market, so I’ll skip to the next.
ARM Holdings plc (NASDAQ: ARMH) is a UK based company that manufactures the microprocessors used in Apple Inc.’s iPhones and iPods. The basic assumption here is: The more iPhones and iPods Apple sells, the more processors ARM will sell. It currently looks pricey at a P/E of 53.2X, though this is actually slightly below the stock's own 5-year historical average (54.1X). Since the recession, ARMH has grown its earnings at an average annual rate of 34.1%, driven by double digit top line and free cash flow growth. At a PEG of 0.5, this stock looks to be undervalued at the moment. ARMH also beat the Street's most recent earnings estimates by about 15%. Going forward, analysts are expecting the company to finish 2012 with an EPS of $0.55, up from the $0.42 a share it reported in 2011. If these estimates hold, fairly valued shares should rise above $29 by year's end; they currently trade in the $23 range.
Qualcomm Inc. (NASDAQ: QCOM) supplies the CDMA chips found in the iPhone4 and 4S, as well as in almost all android smartphones. Net income has grown steadily over the past three years and analysts expect it to grow at 15.48% for the next five years, compared to the communication equipment industry's average of 12.77%. The stock is currently trading at a P/E of 19.0X, which is below its 5-year historical average (24.2X). With a PEG ratio of 0.8, the stock looks undervalued, at least in terms of its earnings valuation. In the last quarter, the chip maker beat analysts' earnings estimates, though it lowered its guidance for the next quarter. Results are set to be discussed on July 18th; any outperformance could be a boon for shares of QCOM, as markets are expecting an underperformance. Check back here for updates on this situation.
SanDisk Corp. (NASDAQ: SNDK) manufactures the flash memory that comes with most smartphones. I think it is a better buy than its rival, Micron Technology, because (unlike MU) SNDK is expected to actually grow earnings next year. Sandisk is expected to grow at 15.10% in the next five years, and is currently trading at a P/E (9.7X) below the industry average (14.2X) and its own 5-year historical average (14.4X). In fact, SNDK's earnings have traded at a 4% discount relative to the S&P over the past half-decade. This year, shares appear much cheaper, trading at a 31% discount. With an attractive PEG ratio of 0.7 to boot, there is little to dislike about this stock from a valuation standpoint. If the company is able to maintain its 2013 earnings guidance of $2.99, fairly valued shares should rise above $40 by next summer. The stock currently trades in the $34 range.
First Trust NASDAQ CEA Smartphone Index Fund (NASDAQ: FONE) is an ETF that invests in a basket of smartphone stocks, both in the US and abroad. This is probably the easiest way to put your bet on the growing smartphone industry, but you can’t expect it to move like Apple’s stock because of its diversification. Interestingly, the ETF has been down over 17% in the past year, as the fund has been criticized for not holding enough of the tech giants; Apple, Google, and Samsung amount to just around 8% of its total weight. Going forward, ETF enthusiasts should monitor FONE, as it might make a nice rebound play for the remainder of 2012 if it can expand its holdings in these stocks. To learn the secret behind how to really play ETFs, curious investors can continue reading here.
While these investments look to benefit from the ongoing smartphone boom, they are meant to serve as a guide for further research, not a laundry list for picks. To continue reading, visit WealthLift INSIDER for more trading ideas today.
This article is written by Jason Ramos and edited by Jake Mann. They don't own shares in any of the companies mentioned above. The Motley Fool owns shares of Apple and Qualcomm. Motley Fool newsletter services recommend 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.If you have questions about this post or the Fool’s blog network, click here for information.