The Technology S-Curve And Wireless Broadband

by: Ted Stamas

You don't need a high score on the Wonderlic IQ Test to comprehend that the technology world isn't standing still. Engineering and design brilliance have turned complicated handheld mobile devices into simple appliances. Apple (NASDAQ:AAPL) doesn't even include instruction manuals for their popular products. They're intuitive. You either get it, or, you don't. The same can be said for Google's (NASDAQ:GOOG) Android phones. Apple evangelicals can chide the competitive products, but they're on the same wavelength.

One statistic that has been a big influence on my recent investing decisions is that new smartphone activation will increase from 170 million devices worldwide in 2011, to 1.75 billion in 2016. This forecast is from market research firm Maravedis and is in the ballpark with projections from similar research firms. The report doesn't even include the embryonic tablet market which is supposed to cannibalize PC sales for the next few years. Infinite Research is predicting a 56% compound annual growth rate for tablets for the next half decade.

From my vantage point, this proliferation of multi-touch input devices like the iPhone and iPad creates an enormous opportunity for investors. In reading Walter Isaacson's biography of Steve Jobs, there was a quote by Mr. Jobs about his innovation philosophy. He used Wayne Gretzky's maxim, "Skate where the puck's going, not where it's been." I think all long-term stock market investors attempt to utilize this strategy, but getting the timing right is often difficult. Sometimes it's the luck of the draw when a sector gets in gear. Well, for those investing in smartphone and tablet plays, the time might be now.

To illustrate my thesis, let's examine the technology adoption s-curve developed by Everett Rogers in the early 1960's (graph courtesy of Wikipedia).

(Click to enlarge)

What this graph demonstrates is that with successive groups of consumers adopting the new technology (shown in blue), its market share (yellow) will eventually reach the saturation level. We've got a long way to go before we reach the point of diminishing returns. As market share increases so does your propensity to reap big rewards from the companies that flourish in this space.

When you think internationally, we're in the beginning part of the early adopter phase of the iOS and Android operating systems. China and India are just starting to purchase smartphones, let alone the rest of the world. Don't forget that these two operating systems also power the tablets in their respective ecosystems. Throw in new entrant Microsoft (NASDAQ:MSFT) with their collaboration with Nokia (NYSE:NOK), and you've got a high-voltage uptake in mobile devices. My view is that the next few years could be interesting if you are so inclined to invest in the sector. The future isn't what it used to be.

For the past two months, I've been blogging about small pure plays in the sector in addition to an article featuring industry leader Apple. Since earnings season is upon us, I want to do a quick review of some of these securities before I start to dissect their numbers and guidance, once they hold their respective conference calls. I've taken positions in a number of these entities and have structured my portfolio to be set-up like a mini wireless broadband mutual fund:

  • Although Apple and Google are instrumental in the wireless broadband sector, I have opted not to take positions in either company because their market caps are much too large from my perspective. Patient investors may double their money in these stocks at their current valuations, but ten baggers are out of the question. Apple reports on Tuesday, April 24th, and could supercharge the entire sector if they have another blowout quarter.
  • Sequans Communications (NYSE:SQNS) reports earnings on April 26th. I bought this integrated circuit manufacturer at a fraction of its IPO price. Their crown jewels are their patents of 4G LTE semiconductors and their relationships in China. It sells for roughly $2.50 and keeps me up at night. I believe in holding stocks for years if they still hold promise, but, considering its scatter shot earnings history, I will consider selling if the guidance in the upcoming quarter is unexciting.
  • Acme Packet (NASDAQ:APKT) is a telecom infrastructure play that is broadening its scope into wireless with their position in Voice Over LTE. They report on May 2nd. Average analyst earnings estimate is for $.21/share. I wanted to include Broadsoft (BSFT) in the portfolio, but they are overvalued. Acme Packet and Broadsoft partner in the wireless space, and I believe I got a better valuation by taking shares in Acme Packet.
  • Glu Mobile (NASDAQ:GLUU) is an internationally positioned, platform agnostic game application developer for handheld mobile broadband devices. It reports on May 2nd and is projected to lose $.08/share for the quarter, although be profitable for the year. There is seasonality to the gaming business, and Glu makes considerable profits in the 4th quarter when customers upgrade to new phones for the holidays.
  • Ceva (NASDAQ:CEVA) is another semiconductor company and also reports earnings on May 2nd. They license specialized processor cores that convert analog information such as voice, video and images into a format that can be used by digital devices. I bought this stock recently when it was trading at a 52 week low, and it still trades in that range. Average analysts estimates are for a profit of $.22/share. I've seen this stock described as a mini ARM Holdings (NASDAQ:ARMH).
  • Synchronoss Technologies (NASDAQ:SNCR) is one of my favorite stocks in the sector and reports on May 2nd. The caveat to this security is that they do 50% of their business with AT&T (NYSE:T). If they lose that contract, the stock gets hammered, but they are expanding their client base. Synchronoss does a lot of the behind the scenes processing on smartphones. Average earnings expectations are for $.25/share. I paid a premium price for the security, but wanted to lock in my price in case it trended higher.
  • The last stock I purchased is also reporting on May 7th. Velti (VELT) is a European company with a worldwide advertising distribution platform for smartphones and tablets. Their weakest market is the United States, but they have a strong presence in Europe, India and China. They are expected to lose money this quarter, but be profitable for the year. This equity could be a cash cow with its global footprint.

Two other companies I've covered, but did not buy are Allot Communications (NASDAQ:ALLT), and NXP Semiconductors (NASDAQ:NXPI). Allot does Deep Packet Inspection, and has been running up because Investor's Business Daily and Jim Cramer have given it a lot of coverage. If it sells off, or, the market gets a major correction, I will consider buying some shares. NXP Semiconductor makes the inner components for Near Field Communications, which enables you to make credit card transactions with your smartphone. This technology won't ramp up for another year, so I'm waiting to get some shares at a more advantageous level.

Disclosure: I am long SQNS, APKT, GLUU, CEVA, SNCR, VELT.