PowerTrend Brief: Consolidation Brings Pain and Investing Opportunity

Data collected from telecom companies and network operators shows that smartphone penetration has broken the 50% mark this summer. On the heels of that breakthrough, this week is a focal point of sorts for new smartphones, as three companies have scheduled events. These are, of course, ahead of Apple’s (AAPL) expected introduction of its next iPhone model later this month. If history and the evolution of other industries hold, this could signal the beginning of the end for most smartphone manufacturers.

Nokia and its smartphone operating system partner Microsoft (MSFT) will hold an event in New York on Sept. 5 at which the two will likely showcase a new Lumina smartphone running Windows Mobile 8. The official launch date for the Windows 8 operating system is Oct. 26, and it makes sense that Microsoft would want to showcase products ahead of that launch. That thought has also prompted speculation that Nokia could introduce a Windows 8 tablet. With the timing set to have any product on the shelves in time for the 2012 Christmas selling season, prospects of a Nokia tablet are at least fifty-fifty.

Teamed with Verizon (VZ), Motorola is also expected to announce a new phone on Sept. 5. Housed inside of Google, it’s pretty much a sure bet that any new Motorola device will be running Android. Given the recently introduced Motorola Atrix HD for AT&T (T), odds are that the new Verizon device will also have an HD display. As with Nokia, speculation is also building that Google-Motorola will update its tablet offering. With the domestic mobile phone market reaching saturation and Apple the head-and-shoulders tablet market share leader, the mobile carriers will increasingly turn to data as a source of revenue growth.

The third player is Amazon.com (AMZN), which is also slated for an unveiling of sorts on Sept. 6. Amazon.com entered the tablet space a few quarters ago with its Fire product and the company was one of the early vendors for e-readers with its Kindle line. Odds are that Amazon.com will refresh its line up in advance of the Christmas selling season, but there could be one more thing. That potential product could be a smartphone and if so, a device backed by Amazon.com could be one that actually challenges Apple’s iPhone.

In terms of the growing number of smartphone models being offered, the push to get them in the hands of consumers will pressure average selling prices and margins, particularly at device-only vendors. This is especially true given the better than 50% penetration level I mentioned earlier. Historically that pressure has been an indicator that the market is maturing and that commoditization is not far behind. We’ve seen this movie before in other consumer electronic devices – radios, TVs, VCRs, DVD players and even mobile phones as well as gaming systems all started out as high price point items only to fall considerably over time as the feature set and hardware become commoditized.

Perhaps the best example is the PC market. Much like smartphones and tablets today, a number of companies entered the PC market back in its hey-day, but the resulting commoditization pressured average selling prices and margins. As we look in the rear-view mirror, a number of PC companies have gone by the wayside and this is what we are starting to see in the smartphone space. Palm is gone, Dell (DELL) exited the smartphone space, at least domestically, and we will see what happens to Nokia (NOK) and Research in Motion (RIMM). Make no mistake, tablets will be next.

But that does not mean that all is lost. Inside these devices there are new technologies, as well as updated ones that bring improvements, be it in processing power, connectivity or the display. The roll out of of 4G LTE domestically by AT&T (T), Verizon (VZN) and Sprint-Nextel (S) and international carriers like Vodafone (VOD) bodes well for RF semiconductor companies like Skyworks (SWKS), RF Micro (RFMD) and TriQuint Semiconductor (TQNT) as it increases their dollar content per device. Evolving displays in both smartphones and TVs should foster interest, if not revenue, for companies like Cree (CREE) and Universal Display (PANL). While still in its infancy, mobile payments are another development to watch as we see how mobile carriers embrace Near Field Communications from NXP Semiconductors (NXPI), as well as payment services from Square, eBay’s (EBAY) PayPal and others.

The above speaks to the heart of two of my investing philosophies. First, recognizing a PowerTrend when it occurs, by which I mean a market shift that shapes and impacts consumer behavior, forcing companies to make fundamental changes to their businesses in order to succeed. In recent years, the best example is Apple (AAPL) which has been a PowerPlay as it single handily altered the course of the music, book, TV, movie rental, smartphone and computing industries. How Apple impacts the mobile payment space, we will find out eventually. The second is “buy the bullets, not the guns” strategy that favors key suppliers poised to grow faster than the customers or end market that they serve.

These are the kinds of investing strategies that subscribers to my PowerTrend Profits newsletter get each and every week. Come get on board.

Sincerely,

Chris Versace
Editor, PowerTrend Brief

The Week Ahead

Hopefully you and your loved ones are enjoying your Labor Day holiday. As we bring an unofficial end to summer and summer vacations, we have but one month left in the current quarter and only four left in the investing year. Traders’ eyes will be focusing on Friday’s August Employment Report as the Federal Reserve has signaled that this is a key indicator it is watching. As usual, we will get several third party views on the health of job creation in August ahead of the government’s “official” take on that activity. As a result of those reports, economists will fine-tune their forecasts ahead of the Bureau of Labor Statistics’ August findings. As a reminder, July added 163,000 non-farm jobs and while that was better-than-expected, I’ll be watching to see if the recent trend of downwardly revising job creation continues as it has in prior months.

Here’s a more granular look for what’s on tap this week:

Monday, September 3
Stock Market Closed

Tuesday, September 4
ISM Manufacturing Index (August)
Construction Spending (July)
Auto & Truck Sales (August)
Campbell Soup Co. (CPB)
Comverse Technology (CMVT)
Finisar Corp. (FNSR)
Nexxus Lighting (NEXS)
Smithfield Foods (SFD)
Teavana Holdings Inc. (TEA)

Wednesday, September 5
MBA Mortgage% Index (Weekly)
Delta Apparel (DLA)
Dollar General (DG)
H&R Block (HRB)
Men’s Wearhouse (MW)
VeriFone Systems (PAY)

Thursday, September 6
Initial and Continuing Jobless Claims (Weekly)
Challenger Job Cuts Report (August)
ADP Employment Report (August)
ISM Services Index (August)
Cooper Companies (COO)
Hovnanian Enterprises (HOV)
Mattress Firm Holding (MFRM)
National Beverage (FIZZ)
Smith & Wesson Holding (SWHC)
USA Technologies (USAT)

Friday, September 7
Employment Report (August)
Brady Corp. (BRC)
Casey’s General Stores (CASY)
Kroger & Co. (KR)
Lululemon Athletica (LULU)
RF Industries (RFIL)

Upcoming Appearances

• Listen for my weekly appearance each Monday on Amercia’s Morning News to talk about the economy, the stock market, stocks and more.
• On Saturday September 9, I’ll be giving a presentation to the Baltimore Chapter of the American Association of Individual Investors on current technological trends.