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Smartphone Revolution Stirs Up Telecom Sector

Posted: Sep 16, 2009 11:34 AM by Eugene Bukoveczky

Tickers in this Article: PALM, S, T, VZ, DT, GOOG, RIMM, AAPL, MOT

In the race to capture the lion's share of the profitable smart phone market, one-time leader Motorola (NYSE:MOT) fell to the back of the pack as stronger contenders like Apple (Nasdaq:AAPL) and Research in Motion (Nasdaq:RIMM) continue to battle for lead position. However, a new deal with internet search giant Google (Nasdaq:GOOG) to make a new cell phone could put Motorola back into contention.

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At least that what recent action in the company's stock suggests. Since announcing the launch of its new "Cliq" phone, a smartphone targeting younger users with its easy access to social networking sites like Facebook and Twitter, Motorola shares have gained more than 10%.

The Sales Hurdle with Cliq
Bullish analyst comments and positive media reviews have helped boost sentiment. While the consensus is that the product isn't an iPhone killer, its niche market appeal could generate enough sales to help Motorola get back into the black on the handset manufacturing side of its business.

Achieving this will require sales of about 2 million units per quarter according to one analyst; a fairly ambitious target in today's intensely competitive smartphone market. The Cliq will be available in the U.S. by the fourth quarter through a deal with Deutche Telecom's (NYSE:DT) T-Mobile unit, and available in the rest of the world through similar deals with other telecomm providers.

Takeover Talk Fuels Sprint Buying Frenzy
The Cliq marks Motorola's first launch of a handset using Google's new Android software. A second Android-based device is on deck for launch later this year with the rumored provider being Verizon (NYSE:VZ). Verizon needs a snappy new offering to stay competitive with rivals AT&T (NYSE:T), which sells the iPhone, and Sprint Nextel (NYSE:S) which offers Palm's (Nasdaq:PALM) latest offering, the Pre.

However, a deal with Verizon could be off the table as rumors recently surfaced regarding a possible merger between Sprint and T-Mobile. Sprint shares popped more than 10% as the rumors gained traction from analyst comments that the U.S. telecom scene was ripe for consolidation and that deal made perfect sense. A combined T-Mobile/Sprint entity would be the second biggest mobile telecom provider in the United States.

The Bottom Line
Whether on the handset maker or service provider side of the business, the smartphone revolution continues to shake things up across the telecom landscape. Industry events are now likely to move with even greater speed and from unexpected quarters. In such a situation, the best play may be to take a sector approach, holding a diversified set of stocks from the group thus upping the odds of profiting from any further consolidation moves. (To learn more, see Dial Up Choice Telecom Stocks.)

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By Eugene Bukoveczky

Eugene Bukoveczky is a freelance writer and investment researcher. He holds a CFA designation and has spent several decades working in the investment business in places like Toronto, New York, London and Dubai. He currently resides in Nova Scotia, where, when not writing, he devotes his time to chopping wood, growing his own vegetables, riding his bike to the store, and thinking about other ways to reduce his carbon footprint.

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