With the pending release of Apple's iPhone 5, market focus has been laser targeted to the smartphone sector. In an earlier article, I postulated that Apple share prices would increase and set forth a trading strategy around this thesis. I also wrote about the Nokia entry into the smartphone wars with the launch of the Lumia 920. Please visit these articles to gather deeper intelligence and background.
With Apple's share price exploding to nearly $700 and Nokia up to $2.98, it's time to reevaluate not only the positions, but also the smartphone category as a whole.
What we are witnessing in the smartphone category is a bright spot in an otherwise challenging and risk-mired market. Smartphone use is growing and outpacing traditional computer sales. In many recent articles, and mainstream press releases, there has been a keen increase in financial authors attempting to select a company stock based on smartphone attributes, or lack there of. Selecting a company stock based on financial articles touting product features and benefits is a mistake. Product design and performance is a key consideration but should be left to consumers to decide the winner. In our technology portfolio we don't attempt to select absolute winners and losers. We work to win the smartphone wars by investing in the companies that are positioned to increase market share and profitability. This is a quasi hedging exercise since we invest in competitive sides of the industry attempting to "ride the rising tide" of smartphone use.
To achieve the goal of winning the smartphone wars we have selected some main participants. Looking to the future, these are Apple (AAPL), Google (GOOG), Microsoft (MSFT), and Nokia (NOK). The primary loser in this scenario is Research In Motion (RIMM).
Company profiles from Yahoo.com
Our trading thesis hinges on the concept that the smartphone market will continue its torrid growth pace (anticipated to be 42% compound annual growth rate), and the product points of differentiation will settle down as we move through the current product refresh cycle to establish both company and product categories that are more inline with other consumer product differentiation models grouping into luxury, value and discount models. As the smartphone market matures, growth in developed nations should slow as market penetration presses against limits. In a recent Comscore report it was reported "114 million Americans used smartphones in July, 2012." Nielsen reported that the USA smartphone market was 55% penetrated. Traditional diffusion curve analysis demonstrates the sales projections as a smartphone market segment.
Although growth in the USA will slow, growth in the rest of the world will pick up as these markets are under-indexed in smartphone penetration. This background also illustrates the danger of placing too much emphasis in what the American market does, and especially what USA carriers do regarding pricing for the new mobile devices included in the current product refresh cycle. We base our smartphone growth thesis on a global basis (not USA centered). The USA is a critical driving force, but as the market matures, the new unit sales will be from non-USA markets.
To capture incremental profits in the smartphone sector over the next twelve to eighteen months, we use a mix of options and long positions.
AAPL: April 2013 deep in the money Call strike $500 premium $204.50.
April 2013 deep in the money Call Strike $600 premium of $122.04
These will be purchased on a price pullback. Our outlook is bullish.
NOK: April 2013 deep in the money Call strike $2 premium $1.30.
January 2014 deep in the money Call strike $3 premium $1.00
These will be purchased after the next earnings announcement and launch of Windows mobile 8.
MSFT: Long MSFT shares building position with pricing under $30.00
Sell to open cash secured Put January 2013 strike $30 premium $1.11
April 2013 out of the money Call strike $33 premium $1.21.
These will be purchased following any price pull back.
GOOG: Sell to open cash secured Put December 2012 strike $600 premium $5.20
These will be purchased on a Google price pullback
These investments, combined with long positions, are designed to increase exposure to the smartphone market and limit risk and costs through the use of options. Our outlook on the market is bullish and we want to be positioned to win regardless of what consumers choose as their smartphone of choice.