Even though Apple’s got the hottest, smartest phone, it currently accounts for only 8 percent of the cell-phone market; but it has hogged 32 percent of the cell-phone profits because the margins it can command are so large. It’s obvious to me, given the edge and the multiple applications that the iPhone has, that the only thing holding back Apple will be manufacturing capacity. That’s why I think this $160 stock will go to $200 shortly after the Chinese start buying. Research In Motion, the company behind the BlackBerry and the originator of the smartphone, and Palm, with its Pre, aren’t positioned as well as Apple, but they’re also good smartphone plays.
So is Qualcomm, which makes the semiconductors, the brains, for almost all of the next-generation smartphones. The vast majority of future smartphones will be built around a Qualcomm chip. The greatness of owning Qualcomm is that you don’t care which phone-maker ultimately prevails, as the company’s got its tentacles on just about every player. Consider it the functional equivalent of Intel.
My next pick would be Cisco, which provides the infrastructure that the telecommunications giants need to get voice and data to its rightful place. It’s hard to build a network powerful enough to handle these cell phones without calling on the No. 1 networking company in the world to do it for you. After a huge decline in equipment orders during the recession, Cisco just announced that it has seen its first significant order increase in more than a year, a lot of it related to the mobile Internet. Three smaller infrastructure plays, Ciena, Tellabs, and ADC Telecom, enable streaming video to look like high-quality TV on your cell phone. All three, bizarrely, have gone largely unrecognized, despite their important supporting-cast roles in making these devices so powerful and useful.
Then there are a host of little companies that power the cell phone’s coolest components: Cypress Semiconductor makes the touch screens; SanDisk makes the short-term memory that allows you to store reams of data, music, and video; Tessera has the patents for the optics for the smallest and best cameras; and Cree provides the lighting. ON Semiconductor, RF Micro and Skyworks Solutions provide the signal strength needed to accept and receive information on your phone. And who knows what ap producers or software developers or mobile-oriented websites will emerge as winners in this arena. A market this big generates all kinds of lucrative submarkets.
The questions you have to ask when you spot big new investing themes are, Am I late to the party? and Have the stocks moved up too much? The answers in this case are nope and not a chance. The products themselves will only get better and cheaper, and vast markets for them remain untapped. The large institutional money managers, never especially hip to new technologies and still gun-shy from the last tech bust, have been slow to place bets on this idea, keeping stock prices attractive. We’re only in the first inning of the global changeover from the old technology to the new. Getting in now is just plain smart.