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Published: June 14, 2010
One of the challenges of buying an industry
leader such as Apple (Nasdaq: AAPL) is that it is "priced
to perfection." The value of its stock implies that the company
will fulfill all of the high expectations placed upon it. More
than likely, Apple will keep on delivering winning products, but
that would be a surprise to almost no one. So it’s hard to see
how any more good news is not yet built into the stock. For
example, few expect shares to gain a major boost when the next
iPhone is released on June 24. Its success is already expected.
But what about Apple’s rivals, who have sat idly by and missed
out on the technology revolution that Apple has pioneered? Few
expect these rivals to get a major slice of mobile device
market, so they are "priced to imperfection." Yet as we saw with
Nokia (NYSE: NOK) a decade ago, and Motorola (NYSE:
MOT) five years ago, these lagging rivals can sometimes get
it right, and when they do, shares can zoom ahead.
With that in mind, here’s a look at what these firms are cooking
up, and how you can invest in the space.
Dell (Nasdaq: DELL)
Dell is among a number of companies that have announced plans to
come up with a rival for either the iPhone or the iPad. In
Dell’s case the company is going after both markets by offering
a product that slots somewhere in between. The company's Streak
is already selling in the United Kingdom, and will be launched
in the United States later this summer. By Labor Day, we’ll know
if consumers see the product as the best of both worlds or the
worst of both worlds. It’s about 30% smaller than an iPad, which
makes it difficult to use as an electronic reader, and with a
5.25-inch screen, it may be too big to use as a daily cellphone.
Then again, it’ll be easier to lug around than an iPad. And you
can use it make calls.
Of course, the success or failure of such a device depends on
how many apps it can run. If Dell were to try to build a base of
apps from scratch, it would never catch up to Apple. Wisely, the
device runs on Google’s (Nasdaq: GOOG) Android operating
system, which is becoming more popular by the month with app
developers. A range of hardware vendors are coalescing behind
Android, increasing the odds that it will end up creating a pool
of apps -- and users -- to rival the massive iPad/iPhone
community.
For Dell, the Streak is unlikely to be a game changer even if
successful, because it will still represent a fraction of its
overall hardware business. But the device could serve as a halo
product for the rest of Dell's offerings, making the company
relevant once again in the consumer space.
Dell's positioning among businesses remains fairly strong. The
company's line of high-end PCs, servers, storage devices, and
other enterprise-focused wares may not have shown much growth in
recent years, but is still a massive cash generator. Dell
generated about $3 billion in
operating income in calendar 2009, and the current year is
already off to a good start. If companies start to more
aggressively invest in the latest Windows operating system, then
cash flow should approach $4 billion by next year. The new
Streak, to the extent that it energizes the consumer business,
could push
cash flow up another +20% by 2012 or 2013. And that would
lead to Dell once again being seen as a growth stock, and
finally start to generate a
price-to-earnings ratio (P/E) closer to high-flying Apple.
Right now, shares of Dell trade for around nine times fiscal
(January) 2012 profits. And the multiple is well lower when
Dell's $5 billion growing cash pile is excluded. In contrast,
Apple's
P/E multiple is around 20 (on a
fiscal year that ends four months earlier. Here again the
multiple is lower when cash is excluded). If Dell could simply
justify a forward P/E ratio closer to 12 or 13, then investors
would be looking at a +30% to +40% gain.
Motorola (NYSE:
MOT)
The Motorola RAZR
was an immediate
sensation when
launched, pushing
shares north of $25
in 2006. These days,
shares are off
nearly -75% from
that peak, as it's
been a long time
since Motorola led
the mobile device
market. Motorola is
trying to regain
some buzz, and its
recent Android-based
phones are selling
fairly well and
carrying impressive
gross margins. But
Motorola has yet to
show its hand in the
iPhone/iPad market.
Rumors abound that
it will unveil an
iPad-like device
later this year, but
it's unclear if the
company has any
brand loyalty left
with consumers.
Motorola has plans
to spin off its
mobile devices unit,
and management has
expressed hopes of
creating some buzz
for the division
prior to any
spin-off. In the
meantime, shares
mark time in the $7
range, 15% to 25%
below where analysts
expect the stock to
land once the
spinoff plans come
into sharper focus.
Shares have probably
found a floor in the
current range, and
any new iPad-like
device might help to
give a short-term
boost, though it’s
worth noting that
Dell's announcement
of the Streak failed
to move shares much
higher. As of now,
investors remain
convinced that Apple
has sewn up this
market lock, stock
and barrel.
Nokia (NYSE: NOK)
Once-mighty Nokia
has been a real
disappointment for
its backers, with
its U.S.
market share
rapidly shrinking
and its European
market share in
steady decline. Make
no mistake, the
company has an
impressively broad
array of mobile
devices, is still a
powerful brand name
across Asia, Latin
America and Africa,
and has strong
relationships with
many wireless
carriers. But the
company made a
mistake by sticking
with an operating
system known as
Symbian, while Apple
and Google's
software has proven
to be far more
robust. The odds of
a rich community of
applications
developers
coalescing around
Symbian hover
between slim and
none.
Nokia has emerged as
a low-cost producer,
which allows it to
offer very
inexpensive phones
in price-sensitive
markets, but the
company seemingly
chose to focus on
the wrong end of the
market. Ten years
ago, Nokia dwarfed
Apple in terms of
market value. By
developing
sophisticated
products with very
consumer-friendly
software, Apple has
generated so much
buzz that it now has
a market value seven
times that of Nokia.
In recent quarters,
Nokia's management
has poured more
resources into R&D,
vowing to once again
become relevant in
the smartphone
market. You can't
count them out. As
this analysis has
shown, every dog has
its day in this
market. But it is
hard to see how
Apple will lose its
way at this point.
Instead, investors
should focus on
which of the
companies can show
some momentum.
They’ve all done it
before.
Action to Take
-->
Shares of Apple are
quite pricey
compared with the
rest of these firms,
by a range of
valuation metrics.
Dell, Motorola and
Nokia all have real
attributes, and not
many supporters.
Rather than try to
pick a winner among
the group, investors
may want to spread
the wealth around,
building small
positions in all
three. Even if only
one of them develops
a hot product to
rival the iPad/iPhone,
the value of the
basket of stocks
would rise smartly.
And if none of these
stocks makes a major
splash, shares are
still likely to find
support thanks to
strong balance
sheets and strong
cash flow
generation.
-- David Sterman
Staff Writer
StreetAuthority |
