The Federal Communications Commission, responsible for regulating the wireless airwaves, is hoping to reserve a large portion of wireless spectrum for an anticipated 13-fold increase in mobile web traffic by 2018.
Wireless spectrum can be thought of as virtual real estate with limited availability. The spectrum, which operates between 9 kHz and 300 GHz, is auctioned off by government agencies to U.S. carriers such as AT&T Inc. (NYSE:T) and broadcasters like DIRECTV (NASDAQ:DTV).
Mobile network provider Clearwire Corporation (NASDAQ:CLWR) is the target of an ongoing battle between Sprint Nextel Corporation (NYSE:S) and Verizon Communications Inc. (NYSE:VZ), a public display of evidence that the demand for wireless spectrum is heating up. The company operates a 4G (fourth generation) network across the United States, and both Sprint and Verizon hope to acquire its spectrum licenses.
Google Inc (NASDAQ:GOOG) is anticipating the rapid growth in mobile by implementing changes to its AdWords program, responsible for the majority of its revenue (and profits). The search engine giant will require advertisers to use Enhanced Campaigns beginning in mid-2013, entailing that companies spend equally on desktop and mobile platforms.
We Fools are long-term investors by nature, so what’s the best way to play this multi-year trend?
Readers should consider Cisco Systems, Inc. (NASDAQ:CSCO), a leader in the design, manufacture, and sale of Internet protocol (IP) equipment. Here are five reasons why I believe Cisco is a solid long-term buy:
- Recent evidence indicates that Cisco Systems, Inc. (NASDAQ:CSCO) is taking market share gains from competitors. Aruba Networks, Inc. (NASDAQ:ARUN) reported preliminary third quarter results on May 7 and actual numbers on May 16. Both reports were extremely weak, causing shares to fall 40% in the last month alone. Aruba is a strong corollary to Cisco Systems, Inc. (NASDAQ:CSCO) as it provides technology for mobile enterprise networks.
- On May 24, Cisco Systems announced the acquisition of Ubiquisys, a privately-held U.K. company which develops technologies that provide connectivity for service providers across heterogeneous mobile networks. The $310 million bolt-on acquisition will be integrated into Cisco Systems, Inc. (NASDAQ:CSCO)’s Mobility Business Group, directly tying into the thesis of this article.
- The company is strengthening its position as the #1 information technology outfit. CEO John Chambers is committed on growing his business at a time when IBM has shown anemic revenue growth, Hewlett-Packard is involved with a massive restructuring, and Dell is beleaguered by an ongoing buyout war.
- Wall Street is bullish on Cisco. Analysts at Citigroup believe the networking giant’s leverage to an improving economy and corporate spending environment is underappreciated, and that consensus estimates for full-year 2013 may prove to be conservative. Citi has a $26 price target but believes shares could reach $30 on a positive surprise.
In addition to the long-term positives above, Cisco Systems, Inc. (NASDAQ:CSCO) is becoming a leader in the cloud computing space. The company has hosted numerous conference calls with Goldman Sachs in recent weeks, highlighting its strength position in a future where businesses are interconnected online.
Reference my article Why Microsoft is the Best Investment in Cloud Computing for a discussion on Microsoft and Cisco Systems as the best cloud investments.
| Aruba Networks | Cisco Systems | Microsoft | QUALCOMM, Inc. (NASDAQ:QCOM) | |
|---|---|---|---|---|
| Market Cap | $1.6 B | $127.7 B | $292.5 B | $110.7 B |
| EPS | ($0.17) | $1.80 | $1.94 | $3.55 |
| P/E Ratio | — | 13.1x | 17.7x | 18.1x |
| Ann. Dividend/Yield | — | $0.68/2.9% | $0.92/2.7% | $1.40/2.2% |
| Beta | 1.7 | 1.2 | 1.0 | 1.0 |
| Short Interest | 17.9% | 1.0% | 1.3% | 1.0% |
| EPS Growth | -133.5% | 33.0% | -29.4% | 24.2% |
| Revenue Growth | 19.3% | 5.1% | 4.1% | 24.6% |
Ancillary play in mobile
A large portion of mobile traffic growth is driven by increased usage and penetration of smartphones. Readers may be surprised to learn that Q1 2013 marked the first time that smartphone sales exceeded traditional feature phone sales in history. According to International Data Corporation, smartphones comprised 51.6% of total phones shipped, or a majority 216.2 million out of 418.6 million total units.
QUALCOMM, Inc. (NASDAQ:QCOM) is a major beneficiary of growing smartphone sales, as its proprietary Snapdragon processor is used in a Who’s Who of mobile devices. CEO Paul Jacobs recently appeared on financial television and stated there’s “a lot of runway” left in the smartphone growth story.
Samsung’s popular Galaxy SIII and new S4, Google Inc (NASDAQ:GOOG)’s Motorola Mobility DROID RAZR HD, Nokia’s new Lumia 920, and Dell’s XPS 10 tablet all have Snapdragon processors developed by Qualcomm. The company also manufactures the 4G LTE modem and multi-band/mode RF transceiver in Apple’s iPhone 5.
I believe that Qualcomm is one of the best stocks to own in the technology universe, an opinion I’ve held since I wrote my first detailed editorial in November 2012 and updated Forget Apple and Google, Buy This Fast-Growing Tech Stock in March 2013.
Foolish takeaway
As of this writing in mid-2013, it appears nothing will be able to slow down the market forces driving an insatiable demand for mobile content. AT&T and Verizon recognized this phenomenon years ago by eliminating unlimited data plans for new subscribers in 2010.
With a long runway of mobile growth ahead, readers should consider Cisco Systems, Inc. (NASDAQ:CSCO) and Qualcomm as the best ideas for investment.
Unfortunately, I cannot recommend Aruba Networks, Inc. (NASDAQ:ARUN) even after the recent sell-off. The company continues to lose market share in the competitive enterprise networking business. Earnings at Aruba Networks, Inc. (NASDAQ:ARUN) have fallen a massive -133% in the last 12 months, while Cisco’s earnings have grown a respectable 33%. Short interest for Aruba also stands at 17.9%.
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The article How to Invest for a 13-Fold Increase in Mobile Web Traffic originally appeared on Fool.com and is written by John Macris.
John is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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