It’s not you, Apple — it’s smartphones
The problem with smartphones should be familiar to tech investors. It’s a massive growth market with huge potential, but over time competition eats at margins and brings the leaders of the space back down to earth. We saw this in PCs, where Dell was once worth more than $100 billion, but struggled as PC margins eroded over time and is looking to go private now at $24 billion. As growth rates slow in industries, price competition ramps up and margins decline as companies must try to steal market share to find growth.
What’s fascinating is that changes in the smartphone landscape such as growth moving to emerging markets seems to have caused quite a bit of uncertainty in the future of the leaders in smartphones but not in the continuing upward trajectory of the mobile industry itself.
Investors seem to be betting that Samsung and Apple won’t be able to remain on their lofty perches atop the industry and are instead buying companies that seem set to win no matter how smartphone market share and profits shake out in the coming years. As you can see in the table below, QUALCOMM, Inc. (NASDAQ:QCOM) and Google Inc (NASDAQ:GOOG) trade for significant P/E premiums to Samsung and Apple.
| Company | P/E | Smartphone Position |
|---|---|---|
| Samsung | 8.5 | Leading Android smartphone company. |
| Apple | 10.2 | Top smartphone company as measured by profitability. Has own iOS platform. |
| Qualcomm | 17.3 | Patent licensing allows company percentage of sales on every data-capable smartphone sold. |
| 24.6 | Controls more than 80% of global search market and owns Android platform. |
Source: Yahoo! Finance for P/E multiples.
A company such as Qualcomm, which is a proxy for mobile growth since it collects a cut of almost all smartphone sales, investors are willing to pay for growth. Yet, with hardware companies such as Samsung and Apple, little to no growth is priced into their stocks. Taking this out a step further and you can see that two of the mobile companies that have seen the strongest rallies in their share price are Nokia Corporation (ADR) (NYSE:NOK) and Research In Motion Ltd (NASDAQ:BBRY) Blackberry, two companies attempting to turn around their sagging fortunes.
The bottom line is that rather than investing in the smartphone leaders of today, investors are putting their money in “safer” plays to capture industry growth or investing in more speculative plays that could pay off handsomely if today’s leaders struggle. The upside to this situation is that if perception changes that Apple’s margins and leadership position aren’t under fire, there’s a willingness to pay P/E multiples in line with the broader market.
If the storyline around Apple changes or it manages to crack some new growth markets with a low-cost iPhone or television, it’s not just earnings growth that could push the company higher but also the expansion of its insanely cheap P/E to levels closer to where the market itself sits.
The article Why Is Apple One of the Cheapest Stocks in the Market? originally appeared on Fool.com and is written by Eric Bleeker, CFA.
Eric Bleeker, CFA has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Apple and Google. It also owns shares of Qualcomm.
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