10 Stocks For The Smartphone Age

by: Helix Investment Research

Of all the global trends of the past 5 years, few have been as prevalent, or as profitable, as the trend of increasing smartphone adoption. That trend will continue full force in 2012, and below we highlight 10 stocks that can benefit from increased smartphone adoption. Before we continue, we should note one caveat. Our list of stocks will focus on companies that benefit from the sale of iOS and Androd devices, as those are the only two platforms that we have confidence in going forward. RIM (RIMM) has yet to show that it can reinvigorate the BlackBerry platform, and Microsoft (NASDAQ:MSFT) seems to be unable to lure consumers to its Windows phone, no matter how much cash it funnels into the platform

  1. Apple (NASDAQ:AAPL): The most obvious stock for investing in the smartphone sector is Apple. The iPhone is the single best-selling smartphone in the world, and in 2011, it accounted for over 43% of Apple's revenue. The reasons for investing in Apple are widely known, and we are among those who believe this company is very undervalued.
  2. Microsoft (MSFT): How can Microsoft tap into soaring smartphone sales if it cannot sell Windows phones? The answer is patents. Microsoft has signed patent licensing deals with almost all Android licensees. And soon, the revenue it generates from patent licensing will exceed the revenue of Windows phones. And while the $1 billion in annual mobile is currently a pittance when compared to Microsoft's $17 billion in quarterly revenue, we think it negates the bearish argument that Microsoft cannot make money from mobile. Of course, since this IS Microsoft, it has to make money in unconventional ways, since it cannot compete on actual products. For us, Microsoft's other secular issues, such as investor sentiment and product roadmaps make the stock impossible to buy. But for investors who think Microsoft is a good company, its Android licensing scheme makes it even better.
  3. Google (NASDAQ:GOOG): Google benefits from smartphone adoption in a roundabout way. For Google, Android was never about simply selling phones. It was, and remains, a way to ensure that users will always use Google services. Google's worst fear has always been that a rival (Apple) would block access to its services, thus lowering the amount of eyeballs that see Google ads. Google benefits from the smartphone revolution in 2 ways. The more Android phones there are, the more certainty Google has that it can sell more ads. Even on non-Android phones, Google services are usually what users default to, and as the world shifts away from traditional computers, Google will be at the forefront of it.
  4. ARM Holdings (NASDAQ:ARMH): ARM Holding's chips are present in every smartphone (as well as tablet). The company is the Intel of smartphones, and it collects licensing revenue and royalties from chipmakers such as Samsung. The company has a stable earnings base, which rises in tandem with the growth of the smartphone market. In addition, the company is moving to challenge Intel (NASDAQ:INTC) in servers and traditional computing, making smartphones just one of the reasons this stock is appealing.
  5. Qualcomm (NASDAQ:QCOM): Like ARM, Qualcomm supplies all of the major smartphone companies, such as Apple and Samsung. The company's chips are present in the CDMA iPhone 4 and the iPhone 4S, as well almost all Android phones. Qualcomm's patent portfolio generates a steady stream of licensing income, and Qualcomm is poised to grow profits as emerging markets shift to 3G networks and the developed world shifts to 4G.
  6. Broadcom (BRCM): Just as Qualcomm is a play on all the smartphone makers, Broadcom is more of a play on Apple, which is the company's largest customers, accounting for 11% of sales. Of all the smartphone semiconductor companies, Broadcom is the most levered to Apple, making it the prime beneficiary of the continued success of the iPhone and iPad.
  7. Skyworks Solutions (NASDAQ:SWKS): Shares of Skyworks have been battered in 2011 on concerns that the company would be shut out of the iPhone 4S. Yet a teardown reveals that the company's chips are still present in the iPhone 4S. Expanding sales of the iPhone 4 should benefit the company as well. Analysts believe that Skyworks will weather the uncertainty in this market better than most of its peers in the power amplifier market.
  8. TriQuint (TQNT): As a company with a market capitalization of less than $1 billion, TriQuint will see more marginal improvement per smartphone than its larger peers. The company has several chips in the iPhone 4S, which will no doubt be the best selling iPhone yet.
  9. Carriers: The major carriers, primarily AT&T (NYSE:T), Verizon (NYSE:VZ), and Sprint (NYSE:S) take short-term hits to margins as smartphone users buy their phones (due to higher subsidies). But over time, the carriers become more profitable because their average revenue per user [ARPU] is much higher for smartphone customers than feature phone customers. Over time, earnings per share at the carriers will rise as the initial hit from smartphone subsidies fades.
  10. First Trust NASDAQ CEA Smartphone Index Fund (NASDAQ:FONE): As with any sector, there is almost always an ETF to invest in it. This ETF is one that invests in a basket of smartphone stocks, both in the United States and abroad. The ETF has an expense ratio of 0.7%, and has over $13 million in assets under management. For investors looking for a quick way to get access to this sector, this ETF is a great way to do that. However, it has two key limitations. The first is that this ETF removes the ability to invest in winning platforms and suppliers. Apple, for example, is not even the fund's top holding, even if it is the premier smartphone maker. Secondly, many of its companies are ones for whom smartphones are not their primary business, such as Sony (NYSE:SNE) or Toshiba. Over time, the ETF should do well thanks to the smartphone market's growth.

The smartphone market is booming and has made many investors successful in the last several years. Given the amount of growth the market still has, it should make investors even more successful in the years to come. While these 10 stocks are by no means all of the stocks that can benefit from the smartphone boom, they are a good representation of companies that can thrive alongside the overall market.

Disclosure: I am long AAPL, GOOG, QCOM, BRCM, S.

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