Google (GOOG) seems to be a better and better investment as its mobile device peers continue to struggle with product-specific problems. Should investors go with Google's many-device Android platform strategy, or stick it out with a competitor?
Diversification is Good for Companies, Too
As investors, we seek to reduce exposure to particular problems through diversification. The same strategy can reduce risk for firms, too. In addition to Google's acquired Motorola smartphones, there are many other mobile devices which run its Android operating system. This reduces the impact of glitches in service or hardware that can shut down a single-product platform.
Unfortunately, such glitches are more common than you would hope.
For example, the new iPhone 5 cannot connect to the 4G networks of several European carriers. The new 4G networks, which are based on LTE, or long term evolution technology, will allow users to watch videos, play music, and perform other tasks at a much faster speed than 3G. These iPhone 5 restrictions force consumers in these countries to choose between Apple with 3G service or Samsung Galaxy phones that are compatible with 4G networks in these countries.
Analysts predicted that the iPhone 5 will be one of the best-selling tech products in history. Apple has worked with telecom providers to make up for the European 4G compatibility issue to offer promotions and future upgrades to customers. Hopefully these fixes will mitigate this compatibility issue.
Research In Motion's (RIMM) BlackBerry also had problems in Europe recently when its customers found that their service was temporarily disrupted on when Apple launched its new iPhone. This also happened when Apple debuted its iPhone 4S. That Research In Motion's outage lasted three days and prompted a public video apology by the company's chief executive officer.
Fortunately this latest outage has been resolved. BlackBerry users in the Middle East, Africa and Europe lost both email and internet access. It is estimated that more than 78 million BlackBerry subscribers could have been affected by this latest outage, although it lasted less than three hours.
Marketing problems can also cause taint consumer attitudes regarding specific product lines. Illari Nurmi, Nokia's (NOK) former smartphones division head marketing executive, left the company following bad press about how Nokia's new Lumina models' were ambiguously marketed. On October 7th, the veteran marketing executive tweeted about his departure, "I have left Nokia. I am thankful for almost 15 [years] there. I wish Nokia all the best and look forward to getting Lumia 920 once available."
Nokia was in the news last month when it produced promotional material consisting of pictures and videos not originally taken by the mobile phone it promoted. This was viewed as misleading potential customers about its new Nokia Lumia 920 smartphone. This mistake has become a debacle for Nokia because it is betting on the Lumina 920 and Lumina 820 to turn around its declining market share. These models are hoped to be an inroads for Nokia and for Microsoft's (MSFT) Windows Phone 8 operating system into widespread use.
The primary reason why Google stock is not a buy given its risk-averaging compatibility strategy is its price. Its $744 a price level makes for high valuations. Investors can buy more revenues per dollar from the S&P 500 since this index has a price-to-sales ratio of 1.29 while this stock has a much higher 5.64 ratio. Google shares currently trade at a high 22.06 price-to-earnings ratio, a higher value than the 14.1 average of the S&P 500 index.
More reasonable valuations are available through the purchase of Apple (AAPL) stock trading around $636 per share. Its price-to-sales ratio is high at 4.01, but lower than Google's ratio. Apple shares are trading at a fair 15 price-to-earnings ratio, in line with the S&P 500 average. As a smartphone play, investors should patiently wait for lower valuations.
Nokia is very different. At $2.70 per share the stock has a bargain 0.23 price-to-sales ratio. However, the firm did not turn a profit there for the last twelve months. The bargain turnaround picture is completed by a low 0.86 price-to-book multiple. This is much cheaper than the 2.05 S&P 500 average especially since it ignores internally-developed intellectual property including patents, brands, and trademarks. If the economic value of these assets were even partially recorded on the balance sheet the firm's price-to-book ratio would be lower.
Research In Motion is a similar bargain at $8 per share. The 0.27 ratio of this stock is very attractive, as is the firm's 0.43 price-to-book multiple. Again, this is an overstated ratio that does not include intangible assets in the denominator.
Investors can capitalize on the various glitches by buying Research In Motion or Nokia shares on bad news that hits their products. Investors should also keep an eye open for lower Apple valuations resulting from bad news stories, too. Investors should note that these firms will continue to suffer from the volatility that comes from device-specific risk and the glitches that are inherent in any product launch.
At today's prices, investors could actually allocate cash to a 80% Apple, 10% Nokia, and 10% Research In Motion portfolio that has better fundamental valuation than Google:
This portfolio is competitive with the S&P 500 average. Though it has a higher P/E ratio than the S&P 500, it also has a lower P/S ratio. In a sense, this portfolio offers a multi-device portfolio just as Google does, but at lower valuations.