The launch of new products, rapid growth smartphones and an increase in replacement sales enabled the mobile phone sector to post second quarter growth paving the path to opportunity for the Technology Select Sector SPDR (NYSEARCA:XLK), the iShares S&P Global Technology (NYSEARCA:IXN) and the PowerShares QQQ (QQQQ).
According to research firm IDC, manufacturers of mobile handsets shipped a more than 317 million units worldwide in the second quarter of 2010, marking an increase of 15% year-over-year. One reason behind this demand is the increased appeal of smartphones. The research firm further stated that sales of smartphones, which account for nearly 19.8% of all mobile device sales, grew nearly 50% year-over-year and is expected to continue to grow. Drivers behind this exponential growth included an improved business environment, healthy operator subsidies, vigorous competition between vendors, and a growing tide of lower-cost models.
A second force that has supported growth is new technology and enhanced product lines which result in consumers wanting to trade-up. Mobile phone manufacturers continue to improve technology seeking to deliver the fastest networks and offer unique features which entice consumers. In fact, a major driver for replacement sales was the transition from traditional mobile phones to trouchscreen and QWERTY devices.
As for the future of the mobile phones, the sector is set to witness healthy growth, primarily in smartphones. Furthermore, this growth in smartphones will likely come from international mobile adoption and the desire for increasingly sophisticated services, like GPS and touchscreen. In some developing parts of the world, like Africa, mobile penetration rates far supersede those of land lines. In fact, the mobile phone penetration rate in Africa is greater than 20% compared to mere 9% for land line penetration. This emphasis on mobile phones in Africa is being fueled by governments in that it is far less expensive to build infrastructure for mobile phones than it is for land lines. As a result, many governments in Africa have made cell phone infrastructure a priority and have partnered with major cell phone carriers to facilitate the development of this infrastructure.
Government’s in Africa and elsewhere made the construction of adequate cell phone infrastructure a priority. In several cases they have performed partnerships with major carriers to facilitate the development of this infrastructure. While factors obstacles such as high taxes, in adequate availability of power and lack of geo-political stability may hinder growth some countries, there are numerous developing countries in which the environment is ripe for further cell phone infrastructure development.
Lastly, the anticipated launch of several refreshed operating systems is expected to further support enhanced demand for mobile phones. In fact Google’s (NASDAQ:GOOG) Android operating system, which is relatively new to the new mobile phones space, has been a hit and is starting to gobble up market share.
- Technology Select Sector SPDR (XLK), which allocates 10.91% of its assets to Apple (NASDAQ:AAPL), manufacturer of the iPhone and includes Google, AT&T (NYSE:T) and Verizon in its top holdings.
- iShares S&P Global Technology (IXN), which, in addition to giving exposure to Apple, includes Samsung Electronics and Nokia (NYSE:NOK) in its holdings.
- PowerShares QQQ (QQQQ), which allocates more than 19% of its assets to Apple and also includes Blackberry maker, Research In Motion (RIMM) in its holdings.
Although an opportunity seems to exist in mobile phones, investing in the aforementioned equities carry risk. To help protect against this risk, the use of an exit strategy which identifies specific price points at which downward price pressure is likely to be seen is important.
Disclosure: No positions