Apple Can't Ignore This Trend Forever

The growing phablet trend in certain parts of the world shows no signs of abating any time soon, and that's something that Apple (NASDAQ: AAPL  ) can't ignore forever. On the domestic front, the iPhone maker has just recently become the No. 1 smartphone vendor in the fourth quarter with 34% of the market, according to recent estimates by Strategy Analytics.

Samsung came in a close second for the quarter at 32.3%, though the South Korean conglomerate came out on top for the full-year 2012. Much of Samsung's success here and abroad has been linked to its broad product portfolio, offering every imaginable configuration of screen sizes to cater to a wide range of markets, including supersized phones that are now lovingly known as phablets.

Apple's recent iPhone 5 was the first time the company increased the display size, but it still remains notably smaller than Samsung's Galaxy S III and Galaxy Note II devices. Is Apple wrong?

What comes down must go up
It seems inevitable that Apple will soon expand the iPhone lineup into a full-fledged family affair, and I expect the company to eventually expand both downmarket with a lower-cost model as well as upmarket with a larger-display model. The real question is when (not if) will Apple make these important moves to reinvigorate iPhone growth?

KGI Securities analyst Ming-Chi Kuo thinks the lower-cost iPhone is coming this year alongside the iPhone 5S. The lower-cost model will likely be made out of polycarbonate and come with six different color choices. Instead of using an older display, Kuo thinks it will carry the same 4-inch Retina display as the flagship.

Taiwan-based Kuo has an impeccable track record with accuracy when it comes to Apple rumblings, so a lower-cost iPhone seems like it's in the cards for a 2013 launch. What about the bigger model?

The next big thing
Since Apple just transitioned to 4-inch displays, it seems like it might be a little while before it adds another display size to its arsenal. Tim Cook's comments on the most recent conference call also seem to reinforce the idea that Apple will stick to its guns for a while:

The iPhone 5 offers as you know a new 4-inch Retina display, which is the most advanced display in the industry and no one comes close to matching the level of quality as the Retina display. It also provides a larger screen size for iPhone customers without sacrificing the one headed ease-of-use that our customers love. So, we put a lot of thinking into screen size and believe we've picked the right one.

Apple continues to emphasize the one-handed usage model, but it's probably the only major smartphone vendor to not offer larger models now.

Both Nokia (NYSE: NOK  ) and BlackBerry (NASDAQ: BBRY  ) are pinning their turnarounds on new models that feature larger displays. Nokia's Lumia 920 carries a 4.5-inch display and BlackBerry's Z10 features a 4.2-inch screen. Nokia's Lumia family had a healthy holiday quarter with 4.4 million units sold and the Z10 is seeing strong initial interest in the U.K. and Canada (it doesn't launch in the U.S. until March).

iPhablet incoming?
Barclays analyst Ben Reitzes was out recently suggesting that an "iPhablet" with a 5-inch display may be in store for the final quarter of this fiscal year (September quarter), or the beginning of next year. Introducing this device would help mitigate downward pressure on average selling prices that will accompany a lower-cost model.

In the meantime, Apple could fend off competitive threats by focusing heavily on improving its software and services. iOS 7 will be detailed within the next few months and could see a major shift in its interface design direction now that Scott Forstall is out and Jony Ive is in. Apple could also make a big splash into mobile payments since it now has over 500 million active iTunes accounts with credit cards on file.

Phablets are particularly popular in China, which Cook believes will become Apple's biggest market. If Apple is to take the Chinese smartphone market seriously, a larger iPhone is a must.

There's no doubt that Apple is at the center of technology's largest revolution ever, and that longtime shareholders have been handsomely rewarded with over 1,000% gains. However, there is a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.


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  • Report this Comment On February 05, 2013, at 7:22 PM, TimKnows wrote:

    Apple made a tall but narrow phone and blew it. Compare their phone to the new Z10 from BlackBerry, Apple missed the mark by enough to make the phone useless. How can a company that big get so many things so wrong?

  • Report this Comment On February 05, 2013, at 8:00 PM, gettmoney wrote:

    Can't Ignore This Trend "Phablet"...such a stupid word

  • Report this Comment On February 05, 2013, at 8:44 PM, bcbaclaysexane wrote:

    Nokia is preparing a big come back.

    Nokia´s Vietnam plant is hiring 10 000 employees to produce 45 million phones a quarter. Nokia still has other 6 factories, the biggest one is Beijing right now.

    Why Nokia is more likely the third horse in the race than BlackBerry:

    1) Competitive prices (with those prices Nokia has already returned to profitability in the recent quarter).

    2) Ecosystem (Windows Phones, Windows tablets, Windows PCs, Xbox games, Xbox Music, Microsoft Office, SkyDrive and so on).

    3) Nokia´s exclusive innovations in Lumia phones

    (PureView camera technology, HD+ sensitive screen technology, advanced mapping platform Here and City Lens, free music with no adds, offline turn by turn GPS, rich sound recording etc).

    4) China Mobile and China Unicom are subsidizing Lumia 920/Lumia 920T for a 2-year or 3-year contract starting from 0 or 1 yuan.

    Beside price competition, Nokia has already partnered with the two biggest operators in China

    (China Mobile and China Unicom together have about 90% of all subscribers in China, and China is now the biggest smartphone market in the world because of the huge population).

    5) Nokia has been just voted as the most trusted brand in the world´s second largest country India, where Nokia´s Asha phones are also selling very well.

    6) Nokia Siemens Networks (NSN) has advanced and competitive technology to build LTE networks.

    According to the Verge and other sources, Nokia may launch these devices as early as February at MWC:

    Lumia Eos (PureView camera phone)

    Lumia Catwalk (international flagship phone)

    Lumia Laser (Verizon flagship phone)

    Windows RT tablet (with added battery in the cover)

    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.

    Nokia´s Navteq has beaten Google Maps for example by signing contracts with Toyota and Ford and many other car companies.

    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 still 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.

    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.

  • Report this Comment On February 05, 2013, at 9:03 PM, TimKnows wrote:

    Apple is dead, Nokia has hired crazies to hype bad phones, oh yeah, Apple has InfoThatSucks, yes, you have found two stocks to short now.

  • Report this Comment On February 06, 2013, at 3:47 PM, marv08 wrote:

    I agree that Apple may not be able to ignore bigger phones, just as they could not continue to ignore smaller tablets.

    While I think Apple's original stances in both cases were correct (while the iPad Mini is a fine device, most productivity apps are much easier to use on the full-size iPad, and I totally see why one should not have to use more than one hand to operate a phone). Personally I liked the iPhone 4/4S form factor better than the "5" (3.5" on a phone is big enough for me) - I also liked the higher weight, the "5" is almost too light; I am torn when it comes to the iPad (I prefer the Mini for reading books and checking/answering email, but I much prefer the bigger one for everything else).

    While I do not want a "phablet" myself (and always have to laugh when people hold these huge things to their ears) and think that there are barely any apps that are really much better on 5" vs 4" (most Android apps show the same screen contents, no matter if running on a 3" phone or a 10" tablet anyhow), I can see that bigger screens attract buyers in shops. Apple might have to do it, I just hope they do this as a separate model (as most rumors say), if Apple stays with "one model only" and makes it 5", I will look into alternatives.

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