The Platform Thesis and the Mobile Market, Part 2

 |  Includes: AAPL, BBRY, GOOG, MSFT, NOK
by: Tulip Farmer

In this posting I want to ruminate on trading the mobile handset market opportunity I talked about in part one. History gives us confidence that the platform pattern will repeat in the mobile handset market. Finding a trading strategy that will win however is a less certain endeavor.

Long Opportunities

If you believe the thesis that there's going to be one big winner, a few also-rans, and a bunch of fatalities it initially seems straightforward - buy the winner. But who will be the winner? If developer mindshare determines the winner, Android and iOS seem to be fairly close. Then there's the problem that Apple (NASDAQ:AAPL) has many product lines, so taking a position in Apple means also betting on their future in notebooks, tablets, music, TV, etc. Android could hurt the iPhone longer term. With Android being an open source operating system, Google (NASDAQ:GOOG) isn't going to make money directly on Android, even if they benefit indirectly from more advertising targets. The market for Android hardware has multiple players, and hardware is famous for its rapid commoditization and thinner margins. HTC is only traded on the Taiwanese exchange, and Motorola's (MOT) record in the handset market is spotty. The best I've been able to do is go long on all these companies, although I'm still searching for broker that will let me trade HTC on the Taiwanese exchange.

If you have ideas please post in the comments.

Short Opportunities

With Palm already acquired after a dramatic drop in its stock price the remaining players that are not already on Android are RIM (RIMM) and Nokia (NYSE:NOK). I began shorting RIM about 6 months ago when the Palm collapse made it clear that Platform economics where well underway. RIM is an attractive short precisely because the company is still doing well by lagging-indicator standards - rising revenue, profit, and subscriber base. What we've seen is P/E contraction over the last year as more investors see the train approaching from the other end of the tunnel. RIM's traditional stronghold of enterprise Exchange integration for on the road workers once seemed impenetrable. What's happening now is that corporate IT is looking around and realizing that many employees already have iPhones and Android devices. Why pay for a blackberry device when IT can just pay for the service plan for a device the employee already has? The company saves money and the employee is happy because they don't have to carry around two devices. My company made this switch recently, and so have others.

I think Nokia is also at risk, but for different reasons. When we think about the fact that the PC destroyed the market for single-function computing devices like fancy calculators and word processors, the same thing is likely to happen as the smartphone market and the just-plain-mobile-phone market become one and the same. This will take a few years, but Moore's Law will make iPhone 4 like hardware reachable at a much lower price point.

While I'm short MSFT for other reasons, MSFT is too diverse of a company to short it just because you think Windows Mobile will lose this contest.

The other risk to shorting any of these companies is that the mobile handset market overall is growing a strong clip. A growing market can raise many boats, particularly early in its lifecycle.

If you have ideas on others to short the platform thesis, leave comments below.

Mr. Market

Mr. Market has been on his meds the past year, staying in a nice trading range. But this won't last. Nobody knows when the next dip will happen, we only know it will. And its not inconceivable we'll see the market go up significantly. So both a long-only and a short-only strategy can be undone by Mr. Market's unpredictable moods. This is why I favor balancing shorts and longs together into a theme to insulate them from market swings that are really unrelated to the thesis. When balancing I look at the dollar value and the volatility of the holdings. By shorting the losers and going long the probable winners, I'm also somewhat insulated from the fact that the mobile market overall is growing. I'm not betting on any particular stock going up or down, just that the winners are likely to outperform the losers.

Nevertheless I'm aware of the flaws and am looking for other positions to take advantage of the evolution of the smartphone market. Components and applications are areas I want to dig into further.

Disclosure: Long AAPL, GOOG, MOT. Short NOK, RIMM, MSFT