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The "Cash Kings" of TechBy Larsen Kusick, analyst, Phase 1 InvestorMonday, June 6, 2011 During 2011, more than a billion cell phones will be sold. And that number doesn't include another 400 million smartphones.
As I've been showing you for about six months now, there's huge opportunity in the global mobile phone boom – billions of dollars for the winning companies... and big, safe gains for shareholders. But there's big, portfolio-scuttling risk, too.
I'll get to the opportunity in a moment. But first, let's cover the dangers...
Nokia is one of the world's biggest cell-phone manufacturers. It's trading at just 1.2 times book value and nine times this year's earnings expectations. And with the mobile phone market booming, it might look like a tempting value play.
Don't fall into this trap.
Last week, Nokia warned its core cell phone business might not make a profit this quarter. In April, the company said it expected sales of around $9 billion this quarter. Today – less than two months later – Nokia is expecting sales in the low-$6 billion range. That's a 30% drop in sales for what should be a stable business.
In December, I wrote:
Be careful with major phone manufacturers, like Nokia, that sell cheap phones. [Low-priced knockoffs] will continue to ruin the low end of the market even as the global cell phone market booms over the next year.
That's still true. And the company is getting squeezed on both sides: Phones that run Google's Android operating system are taking over the middle-tier. And Apple's iPhone is dominating the high-end smartphone market.
In 2009, Nokia had around 37% of the global mobile phone market. That number is on track to fall well below 25% this year. Its future prospects have gone from bad to catastrophic. And since my essay, Nokia's stock has dropped more than 33%.
Nokia's only hope is its first generation of Windows-based phones, which will come out at the end of the year. And many analysts are still predicting a rebound for Nokia in 2013. I think they're wrong.
But Nokia's demise boosts a big opportunity in the global mobile phone boom. You see, Google and Apple are each getting a bigger slice of the pie...
Apple more than doubled sales of its phones over the past year. In the first quarter of 2011, Android phones saw year-over-year sales growth of nearly 600%. Google has nearly quadrupled its market share from 9.6% to 36%.
Even better, both companies are among the safest tech stocks out there. They've got mountains of cash. Apple is sitting on more than $65 billion in cash and short-term liquid assets. Google has nearly $37 billion.
And when you take that cash into account, they're not that much more expensive than Nokia. Google is trading around 12 times earnings, while Apple trades at 11 times 2012 earnings expectations.
As Nokia's market share shrivels, you can count on Google and Apple to gain. They aren't selling low-end "commodity" type products like Nokia. They are selling "lifestyles," and that commands bigger margins and brand loyalty. So if you want to play the global mobile phone boom, stick with the cash kings.
Good investing,
Larsen
Further Reading:
Last month, Larsen told DailyWealth readers about a bill in Congress that could create a huge windfall for big tech companies. Read more here: These "Crazy Cheap" Stocks Could Soon Pay Out Billions of Dollars in Cash.
Get the full story on how the China market is destroying Nokia here: The Dirty Secret of the Global Telecom Boom.
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