“During the Gold Rush, most would-be miners lost money, but people who sold them picks, shovels, tents and blue-jeans (Levi Strauss) made a nice profit.”
Peter Lynch
The mobile revolution is nothing like the gold rush, companies like Apple Inc. (NASDAQ:AAPL) and Samsung have already made tons of money from it, while other like Google Inc (NASDAQ:GOOG) stand to benefit enormously from the mobile boom over the next years by expanding its dominance in search and online advertising into smartphones and tablets.
But it still makes sense to look at the industry suppliers, especially at a company like QUALCOMM, Inc. (NASDAQ:QCOM) which is in a rock solid competitive position to profit from the mobile revolution for years to come, while offering at the same time a historically attractive valuation.
Device manufacturers
When looking at smartphones and tablets manufacturers, things have become a little tricky lately. Apple Inc. (NASDAQ:AAPL) has traditionally been considered the undisputed profit leader, making new sales records year after year, and achieving sky high profit margins above 35% at the operating level.
But investors have been losing their faith in the Cupertino giant lately. The company guidance in its last earnings release signaled steeply falling profit margins for the December quarter. Apple Inc. (NASDAQ:AAPL) has completely renewed its lines of products lately, and this usually means thinner margins. Besides, the iPad Mini is cannibalizing the bigger iPad versions, and most analysts believe this will mean lower profit margins in the future.
Like if that weren’t enough bad news, there have been several reports signaling component orders cuts for both the iPhone and the iPad, and this has created even more uncertainty regarding Apple and its middle term prospects.
Let me be absolutely clear about this: I believe Apple is an absolute bargain at current price levels. Component order cuts can be based on all kinds of reasons, like a shortening product cycle or changing suppliers, so it’s far too soon to claim that demand is weakening for Apple products. Besides, even assuming that profit margins will decline in the future, Apple is trading at a dirt cheap valuation with a P/E ratio below 11.5, so smaller margins are already priced in.
However, Apple is the business of selling premium products at premium prices, so it will hardly dominate the industry in terms of global market share.
Apple Inc. (NASDAQ:AAPL) products are too expensive for consumers in emerging markets, where the carrier subsidy model is not as popular as in the US. In those high growth geographies, Samsung and other low cost producers have a big advantage over Apple when it comes to pricing.
But Samsung is far from a safe bet either; the company is much dependent on Google’s Android operating system. Now that the search engine is launching its own smartphones and tablets, and the products are receiving some notably positive reviews, Samsung could be up for a nasty surprise if Android users start witching towards Google’s products.
As for Google, I wouldn’t call it a bet on the mobile boom. Android is extremely popular, but the company allows hardware manufacturers to use it for no cost at all. Android is Google’s way to make sure that it will be able to capture the growing traffic and online advertising that comes with mobile, but the company still makes much more money in desktop than in mobile. Google’s hardware initiatives look interesting, but still too young to be considered a safe play on mobile.
