Apple's (AAPL) iPad kick-started a revolution in the mobile computing industry. Here are 7 stocks that stand to benefit as the tablet market continues to expand.
Tablets rely on solid-state memory to enable their long battery life, instant-on, lightning-fast characteristics. Solid-state memory replaces traditional magnetic storage still found in laptops and desktops today. Major memory suppliers include Toshiba (OTC:TOSBF)(for the iPad 2 and Xoom) and SanDisk (SNDK) (for the PlayBook and Galaxy Tab). An added bonus to investing in these flash-memory-producing companies is that smartphones currently require this storage, and as laptop manufacturers move away from magnetic storage they will migrate to solid-state. Investors may be concerned with the shrinking margins in memory as the product moves towards commoditization – but as we have seen with magnetic storage in the past, revenues for the manufacturers continued to increase despite shrinking margins, due to more overall units being sold.
Verdict: Toshiba and SanDisk are good buys due to the continued and growing demand for solid state memory in tablets and other mobile devices.
The most expensive component by far in the latest iPad is the display / touch screen, manufactured by LG Display (LPL). Continued popularity of the iPad will help LG, but there’s more – recently the CEO of LG Display announced that more smartphone manufacturers will release models employing LG’s “retina display”, the display currently used in iPhones and iPads. In addition to more players employing LG’s technology, Apple’s next-generation iPad (iPad 3), is quality testing using screens with higher resolution – quadrupling the current pixel count of the iPad 2 and using LG displays.
Verdict: LG’s retina display technology is not matched in terms of resolution, power consumption and response time – as long as Apple sticks with LG Display, you should too.
ARM Holdings (ARMH) creates designs for chips known for their relatively low power consumption and cost, making them ideal for use in mobile and tablet devices. Chips using ARM-based designs can be found in nearly all major tablet devices ranging from the iPad to Android-based devices. Microsoft (MSFT) also announced that its upcoming Windows release (geared for use on tablet devices) will be able to run on ARM-based devices, and this sent ARM Holdings’ stock on a run. With all major tablet manufacturers using these chip designs in one form or another, ARM is poised to rise in the long-term based on increased royalty and licensing revenue from manufacturers.
Verdict: the release of Microsoft’s Windows on ARM-based tablets will bring more consumers into the tablet market, and should specifically help ARMH grow its revenues.
Apple-- with over 9.25M iPads sold in the last quarter alone-- is an obvious pick here. Manufacturers not gaining enough customer traction with their tablets, such as Motorola (the XOOM) and RIM (the PlayBook) should be avoided for now. Research in Motion (RIMM) reported approximately 500,000 shipments of its PlayBook tablet in the most recent quarter, while Motorola Mobility (MMI) announced that only 440,000 units of its XOOM tablet were sold in the latest quarter. Great numbers for new products, but not when compared to Apple – approximately half a million iPad 2s were sold on the first day of the iPad 2’s release.
Amazon (AMZN) should be watched carefully over the next two quarters as the company is rumored to be developing its own tablet to compete with existing e-readers in the market. While not meant to be an “iPad kiler”, Amazon’s tablet will likely transform the current e-reader market by attacking the market share of Barnes and Noble’s (BKS) Nook and by bringing more readers into Amazon’s ecosystem, which already features streaming music and videos.
Finally, out of the ashes of Palm rises HP’s (HPQ) latest entry into the tablet market, the TouchPad running webOS. The device went on sale early July to mixed reviews, but general consensus rates the TouchPad as a good “second-place device” to Apple’s iPad. Early sales figures have not yet been announced, but look for a mention of device sales during HP’s next earnings call.
Verdict: Stick with the major player in tablet design, Apple. Watch Amazon carefully as its new tablet’s release date nears, and follow HP’s announcements to see how the TouchPad is faring in the market. Be wary of “me-too” players in the tablet market, such as MMI and RIMM, that are not gaining ground.
Mobile gaming and online video streaming
As tablet sales increase, software studios have a unique opportunity to reintroduce their games on a whole new platform. Electronic Arts (ERTS) recently reported that the iPad was its fastest growing platform, so look for ERTS to release more and more game titles optimized for the tablet experience to fuel the company's growth. Current titles from ERTS available for iPad include FIFA 11, Tiger Woods PGA Tour ‘12 and NBA Jam.
The company also recently acquired PopCap Games for over $1B, giving the company further reach in the mobile gaming industry. PopCap is known for producing games available on a myriad of mobile devices, and best known for its huge hit ‘Bejeweled’, selling over 75M units of the game. Electronic Arts will compete with companies such as Zynga in the tablet space – Zynga has been successful in porting over its hit games to tablets and will also continue to grow as more tablet games are released. Zynga does not yet trade publicly but filed for an IPO in early July – the deal could value the company at over $20B.
In the online video streaming space, Netflix (NFLX) is actively encouraging users to switch over from a DVD mailing model to a pure streaming model -perfect for Internet connected devices such as tablets. Tablets are ideal for personal video streaming because they are designed to have longer battery life than laptops, and always have bigger viewing screens than smartphones. Netflix’s app for viewing video is available on many different devices (most importantly, on the iPad), and its subscriber base should grow as more customers adopt tablets and then supplement their experience with on-demand video streaming.
Verdict: Electronic Arts (ERTS) is likely to grow given a brand new platform to launch products on, and pay attention to Zynga when its shares begin trading – likely in the last quarter of 2011. Also, since about 2/3rds of tablet owners use their tablet to stream video-- as opposed to 25% on laptops and less than 5% on smartphones-- consider the largest player in the streaming video market-- Netflix.