Apple's (NASDAQ:AAPL) iPhone unit sales were up 142% from the year-ago quarter. iPad sales were up 183%. It was the company's third quarter of 2011 and Apple was the hottest stock on the Street.
Those were the days of the smartphone revolution. Investors who held Apple stock between 2005 and 2011 watched shares soar 1,100%. Or, in Peter Lynch lingo -- that's a 12-bagger.
Oh, how times have changed.
In the third quarter of 2013, Apple's revenue was up just 0.8%. EPS was down almost 20%. Sure, iPhone units sold were up 20% from the year-ago quarter. But that's a far cry from the 142% gain the company boasted back in 2011.
The smartphone boom is slowing down. While IDC's forecast year-over-year growth rate for smartphone shipments in 2013 is still impressive -- 32.7% -- it's decelerating rapidly. IDC predicts a compound annual growth rate in smartphone shipments of just 13.8% between 2013 and 2007.
But with the end of one revolution, a new one begins. In fact, it's already upon us. I'll call it the app revolution. It refers to the services benefiting from a massive (and still growing) installed base of constantly improving smartphone technology. Sure, this revolution began its ascent soon after smartphones hit the market -- but this baby is still in its prime.
4 numbers that prove the app revolution is kickin'
- $1 billion: That's how much Apple is now paying developers every quarter (slightly more than that, actually). Of the total $11 billion Apple has paid to developers, half of that was in just the last four quarters.
- 70%: The year-over-year increase in iOS app developers in China -- totaling a half-million developers now.
- 14.2%: Nearly double 2012's share of total digital ad spending, eMarketer expects mobile Internet ad spending to swell from 8.5% to 14.2% in 2013.
- 41%: The percent of Facebook's (NASDAQ:FB) ad revenue that now comes from mobile, up from zero in the year-ago quarter.
Which companies will benefit?
There is a whole array of companies benefiting from the app revolution. Really, any company providing services that are enhanced through mobile has the opportunity to cash in and ride the wave, including social networks, search, and location-aware services, to name a few.
But where the growth is, competition will surely intensify. That's why the best practice is to find services in the mobile space that are already the best at what they do. Even more, look for signs of a competitive advantage. Efforts like this may leave fewer choices, but the few left will be potential investments, not risky bets. Then, of course, you have to consider price.
Let's filter two potential opportunities together:
Cumulative reviews are up 41% from the year-ago quarter. Active local business accounts have soared 62%. Yelp is the typical example of a company benefiting from the app revolution: A location-aware service that connects people with great local businesses, 59% of searches came from mobile.
But at 19 times sales, is the lofty valuation worth the opportunity? That's a tough one. With management guiding for about 220 million in revenue in 2013, Yelp is still a small player with too many uncertainties to merit its price.
Questions linger: When will the company begin to report profits? Will the company capture large enough scale to facilitate a meaningful network effect that is large enough to keep competitors at bay?
Bam! That's the sound of the sudden monetization of a half of a billion monthly active users in one year's time. In the second quarter of 2012, Facebook's 543 million mobile monthly active users were nothing but a giant untapped opportunity. Swiftly, and almost suddenly, Facebook changed all that. Today, 41% of Facebook's ad revenue comes from mobile.
Going forward, Facebook likely still has enormous room for improvement in monetizing mobile. With 41% of ad revenue coming from mobile and 71% of the company's monthly active users on mobile, Facebook is still making far more revenue per user on desktop than it is on mobile. Though this could be viewed as a weakness, it could also be viewed as a huge opportunity. Given Facebook's performance so far, I'd go with the latter.
Most importantly, the company looks poised to endure for decades. Facebook is wildly profitable with a 74% gross profit margin and its powerful network effect should keep users glued to the service.
Unfortunately, the stock isn't undervalued -- but that doesn't mean you can't nibble on a few shares to hold for the long haul.
Keep your eyes peeled
Yelp and Facebook are just two stocks benefiting from the app revolution. A few other examples worth looking into might be LinkedIn, Google, Baidu, and Zillow. There won't be any dirt-cheap bargains, but investors shouldn't let their initial thoughts on valuation prevent them from digging deeper.
This year, 52.2% of all mobile phones shipped worldwide will be smartphones, according to IDC. Already, Apple and Google have an installed base of 600 million iOS devices and 900 million Android devices, respectively. The foundation has been laid, and now it's time for mobile services to reap the rewards.
There's still time to profit from the app revolution.
What companies benefiting from the app revolution have made it into your portfolio?