You're Underestimating Android's Business Opportunity

The current state of the smartphone industry pegs Google (NASDAQ: GOOGL  ) Android as a majority leader in terms of market share, but it earns a minority of the profits. According to IDC, Android finished 2012 with an estimated 68.3% market share, thanks largely in part to the abundance of sub-$250 Android smartphones in emerging-market economies. This large market share has not translated into the usage share that Apple enjoys. Velti, which operates its ad impression network in 68 countries, found that 67% of impressions went to Apple's iOS and only 37% went to Android. However, Google has a few tricks up its sleeve that should make smartphone gods take notice.

Kill the feature phone
The first order of business is for Google (with the help of its OEMs) to kill off the feature phone. Here's looking at you, Nokia (NYSE: NOK  ) . As of last quarter, feature phones made up 64% of Nokia's device sales, which declined 19% from the year before. Low-cost Android smartphones are cannibalizing Nokia's feature phone business and should be considered an imminent threat to that business. But not only is Nokia's feature phone at risk, its smartphone business is in a vulnerable position as a result of its transformation into a full-fledged Microsoft smartphone vendor. If Android captures too much market share, and/or Windows Phone doesn't get the anticipated reception, Nokia investors may be in for trouble.

When the plan comes together
Increase the installed base of Android, and over the long term Google will continue to unlock more and more value out of its ecosystem. Piper Jaffray analyst Gene Munster envisions that Google will ultimately be able to tie offline activity to online activity, which in turn will improve the relevancy of its mobile ad network. This should translate into more advertising dollars being allocated toward mobile. Ventures like Project Glass offer the promise of connecting the offline world with the online world through a technology known as augmented reality. Combine this type of technology with Google Wallet and all of a sudden Android gets very, very powerful. Granted, we are still years away from this convergence, and until it happens, Android will continue to be underestimated. In the meantime, Google will continue killing off the feature phone.  

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  • Report this Comment On February 02, 2013, at 12:48 AM, zippero wrote:

    The flaw in the author's argument is that users of feature phones and cheap Android phones will somehow be a goldmine for mobile advertisers, but they will never be. The reason iOS earns the most for advertisers is that iOS users are just a lot wealthier. Even Google makes makes 5 times more revenue from iOS users than Android users, even though Android's market share is 3 times higher than iOS's. One iOS user spends 5 times more online than the average Android user, especially when most Android users are still using $50 budget phones like the Samsung Prevail from Boost Mobile running Android 2.3 Gingerbread which is now a 3 year-old version of Android. Android focuses on low-to-middle income bracket consumers who, no matter how many there are in the world, will never be as lucrative as iOS users as a target market for advertisers. Google mistakenly thought by giving Android out for free it could ensure Google's cash-cow search business in a mobile world. It forgot that in any business, 80% of your profit will come from just 20% of your customers. iOS focuses on the top 20% income level while Android focuses on the bottom 80%. To fix this problem, Google wants to come out with the X-Phone as a direct attack on Samsung's new Galaxy S4 and the iPhone 5S/6 to start trying to lure away the richest smartphone users to Google. But Google won't succeed because it lacks the manufacturing scale needed to actually compete with Samsung and Apple. Google will remain dependent on iOS to drive most of its mobile revenues.

  • Report this Comment On February 03, 2013, at 12:31 PM, knickers14 wrote:

    Steve Heller please google Nokia Asha before you write the next Android is great article. It will prevent you from making a (Motley) fool of yourself.

    Also Android is house of cards waiting to crumble.

    As the part (Samsung) becomes bigger then the whole (Android), Google undermining the OEM relationships with a new Motorola x-phone and many (developers and OEM's) continuing to lose money supporting the fragmented platform its just matter of time until this love fest comes to an end.

  • Report this Comment On February 03, 2013, at 3:05 PM, 12368818 wrote:

    Nokia is an opportunity with big upside.

    Nokia´s shorts have even increased from the last two weeks.

    In NYSE Nokia short interest has hit 8.3%, and in Helsinki Nokia short interest has also hit record high 12.15% (this number only counted with investors with over 0.5% of short positions, below 0.5% not listed because of EU law).

    The percentage numbers are counted with

    Nokia´s total share number which is approximately 3.75 billion shares.

    When now Dows and S&P have hit all time highs, there are barely any cheap stocks than Nokia.

    Nokia which has come down 90% from its highest is a stock to consider,

    because it is extremely cheap and the reward can be one of the biggest in NYSE for the future.

    Nokia is a stock with great upside opportunity and why:

    1) Nokia´s bankruptcy is already remote.

    Nokia has increased net cash to about $5.7 billion.

    Nokia´s worst loss has been $290 million a quarter in 2012.

    Even with this kind of loss, Nokia could still deal by its own net cash for at least 4 years!

    2) Nokia won´t have to deal with that kind of loss in the future and why

    A. Nokia has cut cost expenses. The layoff in 2012 starts to be fully effective in 2013.

    B. Now Nokia has to pay royalty to Microsoft, but Nokia has patent incomes.

    C. Nokia has managed to make the important tough work for the basis of its new platform WP.

    Nokia has already sold over 15 million Lumia phones up to date (9.9 million units from Lumia debut till the end of September 2012 + 4.4 million units in the last quarter of 2012 + January 2013).

    D. Nokia has now a high end phone that can make “halo effects” and be compared to Apple´s and Samsung´s most high-end phone, the Lumia 920.

    The demand of this phone is still high in many countries around the world. The 4Q12´s Lumia sales did not include the sales of Lumia 920 in many countries, such as India, Asia-Pacific, UAE, Latin America, and many other countries around the world yet, because the phone was arriving these countries only starting from January 2013.

    Even in Europe, many countries start to get this phone starting 1Q13, for example the Netherlands announced the phone arriving in January.

    And China Mobile received only first lot of Lumias 920T around Christmas, the second and third lot and further have arrived China, and the phone is still selling out.

    E. China Mobile deal. When now, both China Mobile and China Unicom are subsidizing the Lumia 920 heavily, the 2-year or 3-year contract is starting from

    0 or 1 yuan, and considering only less than 1/5 of Chinese people are using highest-end smartphones,

    this will result into a huge number of 2-year or 3-year contract users for Nokia in China! Besides, 3G penetration in China is still very low, there is a huge opportunity there. Additionally, among the highest end phones, Nokia Lumia 920 is significantly much cheaper than for example iPhone 5 and Galaxy Note II. Nokia has an advantage in both the price competition and the biggest carriers´ backing in China!

    F. Nokia Siemens Networks (NSN). During these few months NSN has won many 3G and 4G contracts in many countries.

    According to NSN, they have network equipment that can boost the speed of 4G many times faster. This shows that, beside PureView camera technology, HD+ sensitive screen technology, advanced mapping platform HERE and City Lens, Nokia has also top innovations in building 4G LTE networks.

    G. MWC is coming soon. There are still more to come from Nokia.

    According to The Verge, Nokia will launch PureView camera phone, and also Lumia Catwalk (code name) and Lumia Laser (code name) for Verizon.

    According to CEO Stephen Elop, Nokia is also planning a lot of interesting things with Verizon.

    Nokia is likely launching tablet as well, even with some loyal fans of Nokia around the world buying some of Nokia´s tablets, this will be a good gain for Nokia.

    Nokia will launch more Lumia phones in the coming months to attract different consumer demands. More lower price-point,

    mid-range and high-end WP8 Lumias are to come.

    In 1Q13, beside Lumia 920 and Lumia 820 which are making their way to more markets and with better supplies, Nokia is also attracting the mass markets with budget WP phones Lumia 620 and Lumia 505.

    F. Asha phones. Asha phones are now selling almost 10 million units a quarter.

    Asha phones are affordable and competitive. Asha phones have now more and more smartphone features.

    Apart from features like Facebook, Twitter etc. Asha phones

    have internet access and access to thousands of Nokia´s most popular apps.

    Nokia has also brought an app called “Nearby” into Asha phones. Nearby is almost the same as City Lens in Lumia phones which is exclusive and unique in mapping and location data.

    There is still plenty of room for Asha phones to grow, because the price is competitive (cheapest android is right now about $100, while Asha is only about $70 without any contract).

    Apart from the features and price mentioned above, there are important and good selling points in Asha phones against cheapest androids, for example 40 free most popular games!

    Asha phones are still profitable for Nokia, because the OS is from Nokia itself, Nokia does not have to pay royalty for it.

    3) While bankruptcy is remote, Nokia´s stock price is still heavily undervalued.

    NYSE tech stocks are usually 2x book value, Nokia is still way much below that.

    According to Morningstar´s valuation, the sum of parts of Nokia (NSN, Navteq, feature phones, smartphones and patent portfolio)

    is worth much more than Nokia´s stock price right now, not to mention Nokia´s $5.7 billion net cash added to that value!

    Two years ago NOK was still about $15, now the stock is only over $4, the reason is that the stock has been over sold.

    Nokia is the most short sold stock in both Helsinki and New York! The shorts are much over 20% in Nokia´s total share number which is approximately 3.75 billion shares.

    This is a huge number, considering Apple´s short interest is only around 1% and Samsung´s around 2%. When Nokia is here to stay, the shorts need to be covered and the stock will skyrocket from these levels.

    Nokia Apple Intel Microsoft Cirrus Logic

    0.32 3.0 2 3.0 3.76

    Note that Nokia is currently selling at 0.32 price/sales ratio. This means that if the company manages to restructure and return to normal profitability, the stock has the potential to become a 10x bagger (even from today’s price levels) – assuming the market will value Nokia 3.0x sales like Apple or Microsoft. But even a price/sales ratio of 2, like Intel has, means a 6x bagger from these levels.

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