The growth of the smart phone and tablet device market in the United States, at first powered by Apple's (NASDAQ:AAPL) iPhone, is now becoming more competitive and driving significant valuation changes in both wireless carrier and wireless device stocks.
James D. Breen, of William Blair & Company, is a Wall Street Journal "Best on the Street" analyst. He sees the rise of the smart phone as a squeeze on wireless carrier profits. In this January 23rd interview from a report in the Wall Street Transcript, Mr. Breen states:
"With the advent of the iPhone and the Google (NASDAQ:GOOG) Android platform, really the handset providers are the ones stirring the pot with consumers and saying, "OK, here's this new device, we're going to give you this; here's what you could do with it if the carriers improve their network quality." It phases a portion of the carrier's full capex into the network and to upgrade speeds at the same time that they are forced to subsidize more expensive smartphones. So from a cash flow perspective, it's a little bit of a squeeze."
This wireless carrier cash squeeze in the United States could lead to more rapid valuation changes as bandwidth rich, cash poor companies become targets for larger rivals that have additional spectrum requirements.
Jonathan Chaplin of Credit Suisse (NYSE:CS) is also considered a Best on The Street telecom analyst by The Wall Street Journal. In a recent interview Mr. Chaplin stated that Clearwire (CLWR) is going to become bandwidth bait as the spectrum squeeze plays out:
"Clearwire is the one company out there with massive amounts of unused spectrum, and we think that their spectrum is going to increase in value significantly as data demand increases…
AT&T is going to need more spectrum. T-Mobile is going to need more spectrum. Leap (LEAP) and MetroPCS, (PCS), who had planned to buy spectrum, need more spectrum. So it creates a tremendous amount of demand for Clearwire's very scarce asset."
While the wireless carriers get squeezed for bandwidth, device manufacturers have also seen a big shake up in their sector. Kulbinder Garcha, a Managing Director at Credit Suisse with responsibility for global telecom equipment and IT hardware equity research, put it succinctly in this late January interview:
"You have to remember we are looking at an industry now that has the best part of about 5.7 billion mobile subscriptions out of 6.7 billion of the people in the world."
Mr. Garcha approves of investing in the current trends, with Apple being one of his favorite picks and Nokia (NYSE:NOK) and Research in Motion (RIMM) falling further behind. Mr. Garcha is direct in his recommendations to investors: "Research In Motion has some real difficulties in terms of turning around their business…One of the things about Apple I think that's important to remember is that they only supply 230 carriers today, and globally Nokia and RIM supply 500 carriers. In other words, Apple is still building out their distribution."
|Research in Motion||RIMM||$15.44||3.6||N/A||$6.7 bn.|
|Leap Wireless||LEAP||$9.10||N/A||N/A||$3.1 bn.|
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.