RIMM, AAPL & GOOG in the Smartphone Universe

Just a small part of the global smartphone penetration has been achieved – about less than 15% globally.  More and more people not only here in America, but around the world, want to have a multi-function smartphone.  The biggest barriers at this point are obviously cost and networks.

The three companies that I favor in this space are Research in Motion, Limited (RIMM), Apple (AAPL), and Google (GOOG).  Each company is unique in what function it serves in the space and in this article you will find some of my talking points on each of them and the sector.

There are many other players in this space, all with unique products and services, so I urge you to explore them as well.  Competition will always be there and market share may be lost, but it is the size of the marketplace (which has only been penetrated mildly) that offers the most potential, in my opinion.

Let’s first examine the 90/10 Rule when it comes to typical usage.

• Calls and email/messaging 90%
• All other apps 10%
• RIMM is great at the 90% part and its torch mobile acquisition earlier this year should help with their web browser experience, which is lacking
• AAPL excels at the 10% part
• GOOG fills in the blanks on both with its applications (mostly through apps and email)

RIMM, AAPL & GOOG

1. RIMM: pure wireless play, should earn $5.00 (analysts expectations) by February 2011 and at a 15 multiple, plus $5.00 in cash, you have an $80.00 stock

2. AAPL: more blended company that should capture a fair amount of the wireless smartphone business.  AAPL is currently a one-trick pony when it comes to wireless, but its other products will help to support the company if the wireless smartphone theory doesn’t come to fruition.

3. GOOG: no hardware as of yet, but a great ancillary beneficiary to the entire move toward smartphones.  And like AAPL, Google has its hands in many different pots and unique revenue streams, which it still needs to expand on.

 

Here are the general points

• 165 million smartphones are projected to be sold in 2009; this is projected to increase to 430 million-plus in 2012
• AAPL and RIMM already have proven legacy technology and reliability with their products and operating systems
• RIMM and AAPL have the capability to cannibalize and integrate other smartphone companies’ ideas (of course, this could work the other way as well)
• RIMM is slower to bring new products to market, but products are stable, dependable, geared towards business users
• AAPL’s i Phone is geared towards techies, the young, and artistic types.  Currently, there is limited carrier distribution, but exclusivity is expiring overseas in 2009 and here in 2010*
• GOOG should reap benefits, not only from android phone sales, but with the integration of its services, derive revenue from ad sales and subscriptions.
• The android open source operating system will most likely be the largest of all phone systems, according to many analysts.
• Phone companies typically pay the high”average sales price” (ASP) for a phone,  which is much higher than what the consumer pays. This is subsidized by the carriers themselves, as trends are showing ASPs  decreasing over the next couple years.
• The volume of phones sold will increase as global market penetration moves from about 15% currently to 28% in 2012*
• The iPhone not catching on well in China, so RIMM may emerge as a better contender there, however, there is a mass of competition there which makes entry difficult.

*estimates

Out of the three, RIMM is the most pure wireless play and has seen its stock battered and bruised, which is completely contrary to what GOOG and AAPL’s stocks have done. 

As a contrarian, I may look to RIMM as my stock of choice for a pure play, using out-of-the-money short puts to acquire the stock at a discount, selling them $5-$10 below the current stock price to add a statistical edge in the trade.