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Financial Crisis and the Top 5 Handset Stocks

Posted on Friday, Oct 3rd 2008

Bargains abound amidst the financial fiasco. Let’s look for the ones in the handset sector. The iPhone has created a flurry of activity in the handset market; more handset makers are moving towards the convergence device trend. Just yesterday, Nokia released its response to the iPhone, a touchscreen 5800 XpressMusic smart phone called the Tube, right on the heels of HTC’s G1 phone on Google’s Linux-based Android platform.

The financial crisis is making things tough. Handset makers are reeling under the pressure of higher component costs. Nokia lost market share and RIM missed estimates. And yet, there is still a lot of promise for this sector. Let’s take a look at how the top 5 handset stocks are poised in this market.
Also, this morning, HP announced its entry into the smartphone sector.

 1. Apple
Apple has galvanized the handset world with its iPhone. The main things that set it apart are its amazingly simple user interface and its operating system. And I believe it is also set to make its chip unique. Earlier in the year, it acquired PA Semi to vertically integrate into semiconductors. It currently uses ARM based processors made by Samsung in the iPhone. Its recent 3G iPhone, with a push email function and competitive pricing, have made the phone even more irresistible, and iPhone sales are soaring. And though Apple’s worldwide smartphone market share decreased in Q208 to 2.8% from 5.3% in Q108, the new 3G iPhone is expected to help the company regain market share in the second half of 2008.

The stock has gone from $180 in August down to below $100 yesterday. The chart looks positively scary. But, for those who have been looking for Apple to come down due to macro conditions, this may be your moment. And there was a pathetic rumor of Steve Jobs’ heart attack yesterday which did further damage for no reason.

Chart for Apple Inc. (AAPL)

2. Nokia
Nokia is the leader in the global smartphone market with 47.5% share, down from 50.8% in Q108. The financial crisis and increased competition from Samsung and Apple are making things tough for Nokia, which recently clarified that it would not be going for market share at the cost of profitability. The company recently bought Symbian, the leading OS with 57% market share, and formed the open-source Symbian Foundation with other industry leaders like Sony Ericsson and Motorola. Nokia also has its bets on the Linux platform: it recently upgraded its membership in the Linux Foundation from Silver to Gold. The new Tube phone is based on Symbian, has a one-touch interface versus the sleek two-touch interface in the iPhone, and costs €279 ($391) versus $399 for the iPhone. It also has a Qwerty keyboard, which the iPhone lacks. Remains to be seen is how it delivers on the most important aspects: the UI and the OS.

The stock is down, as expected. But still remains a good one to hold on to, or even buy.

Chart for Nokia Corp. (NOK)

3. Research in Motion
Research in Motion (RIM), the king of the prosumer market, also has a touchscreen model, Thunder, up its sleeve. And in its recent earnings call, there was talk of a new platform. RIM has been churning out new products with great features and looks to be targeting the consumer segment. It recently doubled its global smartphone market share to 17.4%. One key advantage RIM has over Apple is its positioning in the enterprise segment with its killer push mail application. Its operating system is No.2 worldwide with a 17.4% market share. But the company needs to leverage this market share by some strong innovation on the UI.

Another stock that has suffered a terrible drop. I am holding on, though.

Chart for Research In Motion Ltd. (RIMM)

4. Samsung
Samsung is gaining market share with its competitive pricing and hardware design. It displaced Motorola from the No.2 position and holds 15.2% of the global handset market. Though its handsets do not compare with the iPhone’s in terms of the UI and OS, it is doing well on the hardware design. In the price-sensitive emerging markets especially, Samsung is a strong bet. It is also a beneficiary of the 3G iPhone with its design win for the iPhone’s application processor. Samsung is well-situated because of its presence in both the handset business and the semiconductor business.

You can’t buy this stock directly in the US.

5. Motorola
Motorola is a founding member of the Open Handset Alliance, which developed the latest buzz, Google’s Android. It is therefore well positioned to come up with an Android handset. However, it already has products on several platforms: its own Linux-based MOTOMAGX, Microsoft Windows Mobile 6.1, Qualcomm’s BREW, Symbian, and the Symbian-based UIQ. Motorola clearly needs to focus, as it has been losing market share and slipped from the No.2 to the No.3 position, with 10% share in the global handset market. Perhaps splitting the company to create a separate Motorola Mobile Device company would provide the necessary focus. The company is mired in operational troubles, and is a stock I tend to avoid.

Chart for Motorola Inc. (MOT)

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