Four Mules of Mobile

I introduced my “Four Mules of Mobile” on StockTwits TV.  These are stocks in the mobile space that IMO you want to avoid.  If you have an affinity for the short side – you may want to take a shot. I make my pitch around the 6:10 mark.

Backgrounder:

Morgan Stanly provided a great service to investors when it released “The Mobile Internet Report” in December ’09.  The 671 page document takes some time to plow through, but it is packed with information.  After my third or fourth read, I picked up on some of the finer points.  For example, the following statement has become integral to my mobile investing thesis “New Companies Often Win Big in New Cycles While Incumbents Often Falter.” I have written about this statement in several previous blogs (How I am Playing the Smartphone Craze and Will Google Be a Major Player in Mobile).

In the desktop days, Intel, Microsoft, Cisco and Dell were known as the Four Horseman of technology.  These were the “go to” stocks that everybody wanted to own.  A few years ago, Jim Cramer declared Apple, Research in Motion, Google and Amazon as the modern day Four Horseman. (while writing this article, I stumbled across an article I had written on 6/14/07 “The New Horseman of Technology: Cramer Likes My Picks“).

Some companies, potentially a horseman or two, will falter in the transition from desktop to mobile computing.  It doesn’t mean that they will not be viable businesses.  It simply means that Wall Street won’t value their stock as highly as in the previous cycle.  One of my goals is to avoid allocating capital to those companies.   On occasion, I will attempt to juice my returns by shorting the most troubled of the bunch.  I’ll focus my short wrath on four companies that I have dubbed the “Four Mules of Mobile:”

Mule #1) Motorola’s release of the Droid in November, fueled by a $100M joint marketing campaign with Verizon, looked like a winner.  Motorola had worked in concert with Google for nearly a year to fine tune the phone to run Google’s Android OS.  1.05 Million Droids were sold in the first 74 days, slightly ahead of the original iPhone’s pace.  However, as the momentum was really starting to build Google decided to muck things up.

Google announced the Nexus One in January.   The Nexus One was billed as Google’s reference design – a “super phone.”  The Nexus One ran the most advanced version of the Andriod  OS enabling features beyond the Droid capabilities. In two short months, a more capable Android based phone was available directly from Google.  Needless to say, this disrupted sales.

This past week HTC  launched the Incredible (Incredible a Winner) which one-ups the Nexus One.  A mere 5 months from the Droid’s release it is playing second fiddle to not one, but two Android based phones.  It has gotten so competitive, that 2 Droids can be purchased for the price of one from Verizon.

This illustrates the environment that Motorola has tied its future to.  Phones are leapfrogging each other every two months and worst of all, Motorola is subject to Android’s release schedule and functions.   Google has already demonstrated that it will hold back capabilities for its own branded phone.  Very little of Motorola’s destiny is in it own hands.  This is not a stock that I would want to be long.

Mule #2) I have stated my opinion on Research in Motion many times on these pages.  My RIM Rants are a good place to catch up.  Fortunately, RIM has millions of happy users that will stick with it through thick and thin.  Unfortunately, it also has many customers that have iPhone and Android envy.  Many of those will finally move on.

RIM announced on 4/26 that it is releasing a new browser and OS.  Each will arrive in the Fall.  RIM’s version #1 will be competing against Apple’s version #4.  In other words, RIM is three years late.  That may be too much to overcome.

That being said, RIM is a perfect example of a company that will do fine in the age of mobile computing.  It has a very vibrant corporate business that should continue to do well.  However, it will not enjoy the high multiples it has in the past.  As the market begins to understand this, the stock price will settle at a much lower than today’s current price of 69.25.

Mule #3) How can I can the worldwide market leader in both smartphones and total cell phones a mule?  Here is a quote from Nokia’s CEO after releasing a disappointing earnings report in April, “We continue to face tough competition with respect to the high end of our mobile device portfolio, as well as challenging market conditions on the infrastructure side.”

Like RIM, Nokia will be fine as a company. However, its profit margins will remain under tremendous pressure until it can stop the bleeding in smartphones.  Low margins equal low stock price equals mule.  This is hot off the press – Nokia Investors Lose Patience 3 Years After iPhone.

Mule #4) I have to thank Steve Jobs for bringing the final mule to my attention.  Adobe creates software that enables software developers to create mobile applications.  Last week Jobs made his thoughts on Adobe’s Flash abundantly clear.

I am not technical enough to understand the differences between Flash and Jobs preferred alternative H.264 standard for HTML5.  From an investors perspective, its not important.  What’s important is that other companies like Microsoft are agreeing with Apple (Microsoft We Don’t Like Flash Either).

The “mules of mobile” are companies struggling at the transition.  This following quote sums it up perfectly:

Flash is a successful business for Adobe, and we can understand why they want to push it beyond PCs. But the mobile era is about low power devices, touch interfaces and open web standards – all areas where Flash falls short. – Steve Jobs

Microsoft barely missed being chosen as a mule.  It hasn’t been cool to own Microsoft products for 20 years.   Unfortunately for them, a large part of a mobile  devices’ success depends on the coolness factor.  Additionally, some its long time partners like Dell have decided to build phones based on the Android platform.  Most likely that will extend to other devices like tablets.  Last week,  HP a long time Win Mobile user purchased Palm to gain access to Palm’s Web OS.  It immediately cancelled its Windows based tablet and has committed $100M to Palm’s R&D and Sales.

There are no permanent Mules on the list.  I expect some will be replaced with more deserving ones over time.  High on my current watch list are Qualcomm, Garmin and  Ericsson.

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