When it comes to creating an investment strategy, the crucial variable is determining where one believes corporate earnings will be in the future. Trying to determine what the future landscape will be, and not necessarily the current level of corporate earnings, is the real goal.
One of the strongest sectors in the global economy has been the growth of smartphones. The latest data from Gartner, Inc. (NYSE/IT), a leading technology research company, show that during the fourth quarter of 2012, smartphone sales reached 207.7 million units, up a staggering 38.3% from the same time period in 2011. (Source: “Gartner Says Worldwide Mobile Phone Sales Declined 1.7 Percent in 2012,” Gartner, Inc. web site, February 13, 2013, last accessed February 19, 2013.)
Even while much of the world’s economies are not growing at extremely robust levels, a solid investment strategy continues to be focused on smartphone products that are driving corporate earnings in that sector.
Gartner estimates that for 2013, smartphone sales will total nearly one billion units. This clearly shows that corporate earnings will continue to grow in the smartphone category for the near future, which leads me to look for an investment strategy that can take advantage of this information.
While many focus on the hardware manufacturers, I think the big winner over the next five to 10 years will be Google Inc. (NASDAQ/GOOG). Because Google has been able to develop its “Android” platform software to work on both high- and low-end smartphones, this opens up the entire world as a potential marketplace.
I don’t believe many parts of the world will pay the high price for some of these smartphones. Google’s operating system allows manufacturers to provide a product that has a solid operating system with a low entry price point. This investment strategy for both the high- and low-end consumers should help to increase Google’s corporate earnings for many years.
As an example of the enlargement in market share, the Android operating system had a 51.3% market share during the fourth quarter of 2011, which then increased to 69.7% in the fourth quarter of 2012. Apple Inc. (NASDAQ/AAPL) has the second most popular operating system; its market share declined from 23.6% in fourth quarter 2011 to 20.9% during the fourth quarter of 2012.
Apple’s investment strategy to strictly remain in the high-end sector will mean that a large share of the global smartphone market will not be accessible to the company. Since a huge percentage of smartphone sales are in the low-end range, this opens the door for Google to build its market share.
The investment strategy for firms like Google is to continue integrating their software products into a consumer’s life. The more integral Google becomes, the more likely a consumer will continue to use its products in the future. This is a great long-term investment strategy that should drive corporate earnings for many years.
Chart courtesy of www.StockCharts.com
Clearly, investors have recognized that Google’s investment strategy makes sense, as they’ve driven the share price substantially higher over the past year. Corporate earnings continue to grow at a strong rate, and I don’t see this changing anytime soon.
Even with the large move in the stock, the forward price-to-earnings (P/E) ratio is just over 15; and with over $48.0 billion in cash (or $145.00 per share), many investors will be looking to add to their positions on pullbacks. With the relative strength index (RSI) now moving into overbought territory, clearly, it would be advantageous to wait for a pullback before entering a position.
No one can predict the future; however, we can extrapolate from current data to some extent to forecast what’s likely to occur. Developing an investment strategy based on growing corporate earnings through our thesis should provide a highly probable outcome.
Obviously, most of the world does not earn the same amount of money as Americans, yet everyone wants similar features on their smartphones. Google’s ability to fulfill all aspects of the smartphone market is an astute investment strategy that will drive corporate earnings. I would look for the greater integration of Google’s products in future offerings, including reports of an all-new phone built by their subsidiary, Motorola.
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