Look Out Samsung! Lenovo Is Getting Serious About Smartphones

Lenovo (NASDAQOTH: LNVGY  ) , the world's leading PC manufacturer, was already the fourth-largest smartphone manufacturer in the world before it agreed to acquire Motorola from Google earlier this year. With the addition of Motorola, Lenovo will become the No. 3 player, behind only Apple (NASDAQ: AAPL  ) and Samsung (NASDAQOTH: SSNLF  ) .

With Apple and Samsung the only companies making any meaningful profits from selling smartphones, the market is ripe for disruption. Lenovo is positioning itself to be the driving force.

Smartphones will eventually become a commodity
Just like the PC, smartphones are quickly becoming a commodity. At the low end, where price is the most important factor, the slew of cheap Android phones all offer essentially the same experience. There's little room for differentiation at the low end, and the ultimate winner will be the company that can manage the most efficient cost structure.

At the high end, companies are starting to use gimmicks to differentiate their products, and this suggests that smartphones have reached the point where performance gains are going to be less meaningful going forward. Some manufacturers are turning to octa-core processors, under the assumption that consumers will favor a larger number of cores, even if it doesn't help performance or battery life. Chinese company Huawei is including software in its high-end phones that can take "group-selfies," an idea almost as ridiculous as the "selfie" phenomenon is to begin with.

Samsung attempts to differentiate its products with its own software, but it turns out that no one really uses it. Its Galaxy line of smartphones remains extremely popular, but there's no durable competitive advantage that will protect Samsung from the scourge of competition.

Apple does have an advantage: iOS. Apple has a unique platform, and much like in the PC market, this is what differentiates Apple products. While the increase in quality high-end Android phones is certainly not a good thing for the company, those already committed to Apple's ecosystem are likely to stick with Apple products.

I suspect that the smartphone market is going to begin looking a lot like the PC market, with Apple having a fairly small market share but raking in a substantial portion of the profits. Every other manufacturer will be selling essentially the same thing: an Android phone -- or possibly a Windows Phone -- mostly using the same components that everyone else is using. Software could be a differentiator, but so far, it really hasn't been.

Why this is good for Lenovo
When selling a commodity product, the company that manages to be consistently profitable is the one with the most efficient cost structure. It's hard to make money selling PCs, but it's not impossible. It requires scale and efficiency, both of which Lenovo and the other large PC manufacturers have to varying degrees. The smartphone market is no different.

The PC industry carries with it low margins, and it's unlikely that the margins that Samsung is achieving today with its smartphones will be sustainable. Apple is protected to a degree because of iOS, but Samsung is very vulnerable to a market shake-up. With the purchase of Motorola, Lenovo now has a global reach in the smartphone market. Given its track record in the PC market, Lenovo may have the ability to become the low-cost leader.

It's hard to put a number on the potential for Lenovo. About 1 billion smartphones shipped in 2013, and this number is expected to rise to about 1.7 billion by 2017. A 15% market share would translate into about 250 million units per year, and this number could translate into as much revenue as the PC market generates for Lenovo. If profit margins are similar, then smartphones very well could double Lenovo's earnings.

The bottom line
This is all very rough, and it depends on Lenovo's ability to repeat what it's done in the PC market, but the potential is both very real and enormous. Lenovo already has a roughly 12% share of the Chinese smartphone market, and Motorola gives the company a brand that is already well-known in the U.S. and Europe. And with the stock trading around 15 times trailing 12-month earnings, the market does not appear to be pricing in the true potential of Lenovo.

What about Apple?
If you thought the iPod, the iPhone, and the iPad were amazing, just wait until you see this. One hundred of Apple's top engineers are busy building one in a secret lab. And an ABI Research report predicts 485 million of them could be sold over the next decade. But you can invest in it right now... for just a fraction of the price of AAPL stock. Click here to get the full story in this eye-opening new report.


Read/Post Comments (1) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2951800, ~/Articles/ArticleHandler.aspx, 9/22/2014 8:42:07 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Apple's next smart device (warning, it may shock you

Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Advertisement