Ever since Apple Inc. (NASDAQ:AAPL)‘s share price took a dive from $700s to the $400s, a lot of analysts have been trying to come up with reasons behind the cause of the dive. People offered a lot of different explanations, but the most convincing explanations always seemed to be centered on Apple Inc. (NASDAQ:AAPL)’s competition.
It was not uncommon to see analyses where people make statements like “Samsung is eating Apple’s lunch,” or “Research In Motion Ltd (NASDAQ:BBRY) and Nokia Corporation (ADR) (NYSE:NOK) are making a comeback,” or “Sony Corporation (ADR) (NYSE:SNE)‘s new phone is an iPhone killer.” In fact, many people still blame Apple’s competition for the poor performance of the company’s stock. In this article I will argue otherwise.
The logic behind my argument is very simple. If the reason of Apple Inc. (NASDAQ:AAPL)’s recent plunge was competition, we would see competition rallying when Apple is plunging. For example, if people are selling Apple because they are worried about emergence of Samsung, Nokia, BlackBerry, or Sony, they would be buying these stocks up.
Yet, all of these stocks see the same issues Apple sees, and they are all grossly undervalued. What gives? It looks like investors are worried about the rapidly moving smartphone market and they don’t know who to bet their money on; therefore, they are staying away from buying all the smartphone companies.
Could it be Nokia?
Let’s take Nokia, one of my favorite stocks. By now, I’ve written tens of articles about Nokia Corporation (ADR) (NYSE:NOK). The company’s current share price is around $3.5 even though it has $3.7 per share in cash alone. The company’s patent portfolio alone would be worth as much as its current market value. Yet, it trades at really cheap valuations.
After reaching a price of $4.90 per share in mid January, Nokia Corporation (ADR) (NYSE:NOK) saw a sell-off which carried the share price down to $3.20. As the short interest in this company is near all-time highs, it is difficult to say that the majority of investors are buying this company as they sell Apple Inc. (NASDAQ:AAPL) off. Analysts have a target price of $3 on Nokia, which means they expect more downside.
How about BlackBerry?
Then we have Research In Motion Ltd (NASDAQ:BBRY). The company is also witnessing historically high levels of short interest. After reaching $18 in January, the stock has plunged to $13.60 on high volume and high volatility. Many investors and analysts are highly skeptical of this company. The Z10, Research In Motion Ltd (NASDAQ:BBRY)’s new phone, has received mostly positive reviews, even though the phone doesn’t have much of a visibility in some countries like the U.S., yet.
In one study, more than 80% of Americans weren’t even aware of the existence of the Z10. Currently, analysts have a price target of $11 on this company, which implies more volatility and more downside. I am not saying I personally agree with the analysts, but I will talk about this in the below sections.
Are investors buying Sony?
How about Sony? Sony Corporation (ADR) (NYSE:SNE) is another company that is valued cheaply. Even though the company’s share price has been doing better in the last few months, it is still trading as if it will go bankrupt in a few months. Currently, Sony is trading for 0.8 times its book value, 0.3 times its sales, 3.7 times cash flow ,and a PEG ratio of 0.6.
Sony Corporation (ADR) (NYSE:SNE) has been losing money for the last few years, but the company has been turning things around recently, and the turnaround is expected to be successful when coupled with the Japanese Central Bank’s efforts to weaken Yen.
Is Samsung, “The Apple-Killer” doing any better?
Next, we move on to Samsung. Despite having a great growth rate and impressive cash flow, the company still trades for a cheap valuation. Did you know that Samsung currently trades for a P/E of 10? All these months, analysts kept telling us that Apple’s share price is plunging because Samsung is “killing” Apple Inc. (NASDAQ:AAPL), yet Samsung’s share price is just as cheap as Apple’s.
Excluding cash, Samsung trades for about 7 times future earnings. What’s up with that? Samsung’s price to sales ratio is as low as 1.7, price to book ratio is 1.9, and price to cash flow is only 10. We are talking about a company that’s been growing at a double-digit rate for the last several years and is expected to continue growing at a rapid rate. Obviously, Samsung doesn’t trade like an “Apple killer” would.
What does it all mean?
So, what’s going on here? The smartphone market is one of the hottest, fastest growing markets in the world, yet, all the companies in the industry trade as if they are dying. When analysts try to justify Apple’s low price, they blame Samsung, and when they try to justify Nokia’s low price they blame Apple Inc. (NASDAQ:AAPL).
Many investors fall into this trap and stay away from one of the most profitable industries in the world. Between now and 2015, the smartphone market is expected to double. Between now and 2025, the smartphone market is expected to grow between 300%-400%. Yet, all the major smartphone companies are trading as if the market is shrinking as we speak.
Why are investors sitting on the sidelines? Because they are scared off by the analysts. Investors want to buy Nokia, but they hear analysts saying “Apple will kill Nokia.” Next, they want to buy Apple, but analysts say that “Samsung will kill Apple” and so on. Just about 7-8 years ago, Nokia was the king of the mobile phone world. Just five years ago, BlackBerry was the hot company, then Apple dethroned it and now Samsung is dethroning Apple.
The smartphone market is changing so fast that investors don’t know where to put their money. Many investors are thinking that the smartphone market will continue to change rapidly, and the major players will continue to switch sides. They want to wait until the dust settles before investing. However, it may be too late to make a meaningful profit by then.
Conclusion
Since the smartphone market is expected to grow rapidly as a whole, some investors might want to buy shares from every major smartphone company and see growth in their portfolio. This is not a bad strategy. In fact, I have been holding shares of Apple Inc. (NASDAQ:AAPL) and Nokia for a while, and I bought some BlackBerry shares recently.
In the near future, I will be also looking into Sony. Here is the thing though: you don’t want to put all your life savings into one industry no matter what. Investors should make sure to diversify their portfolios as much as possible.
Now, I can hear some readers say “what about Google Inc (NASDAQ:GOOG)?” After all, in the recent months, a lot of money flew from Apple to Google. Of course, Google Inc (NASDAQ:GOOG) will continue to benefit from rapidly growing smart phone market and it can be another good bet for the investors, even though its current valuation is not as attractive as Apple Inc. (NASDAQ:AAPL)’s. Google Inc (NASDAQ:GOOG) will still have to find a better way of monetizing Android.
Jacob Steinberg owns shares of Apple, Microsoft, and Nokia. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple.
