Semis Waiting on an iPhone Tear-down to Rip

Almost a year ago I wrote an article called “For Investors the SmartPhone War is Over.” My premise was stocks of companies in the mobile ecosystem will outperform the device makers going forward.  Sorta like the old saying “the best way to make money in a gold rush is to sell the picks and shovels.” In many cases the component makers win no matter what SmartPhone you walk out of the store with.  My theory worked out pretty well in 2010.

As a benchmark, I used the QFON SmartPhone index.  It is an index that includes companies that are primarily involved in building, design and distribution of handsets, hardware, software, and mobile networks associated with the development, sale and usage of smartphones.  I categorized the stocks by industry and created a spreadsheet with their stock returns.  The component companies (picks and shovels) were the clear cut winners.  Arm Holdings +142%, Atmel +167%, OmniVision Technologies +103% and Skyworks Solutions +101% to name a few.

On the other hand, devices makers such as Research in Motion and Nokia had disappointing years down 13.9% and 19.7% respectively.   Palm was subject to a take under by Hewlett Packard for $6 per share.  Google experimented with being a device maker and didn’t fare well either down 4.2%.  Apple was the obvious exception and I stated that in my article.

I have written about Qualcomm many times (The Trend Rida).  It is almost a given that Qualcomm will be providing the primary communication chip in the Verizon iPhone.  That will be confirmed on Monday night when the first Verizon iPhone’s are delivered and someone “tears it down.”  However, I think the big win will be if iPad2 and iPhone 5 use a combo GSM & CDMA chip.  Qualcomm may be the only company that can deliver that chip.   The tell will be when the iPad2 is announced – will there be two 3G models (GSM & CDMA) or one.  Needless to say, that will be huge win for Qualcomm.

The new buzz is Near Field Communications (NFC).  NFC will enable users to make purchases by waving the phone near a payment terminal.  It actual extends beyond payments.  Think about all of those loyalty cards in your wallet. Your phone essentially becomes an “e-wallet.”  It is rumored that Apple plans to embed NFC in iPad2 and iPhone5 (Bloomberg).  The company providing that chip wallet will “runneth” over.

I have identified four companies in the NFC space.  I am sure there are others.  Rest assured, Apple will only be using a provider that can produce millions of chips.  Start-ups need to apply.  NXP Semiconductor is a name many may not have heard of, but it is a spin-off of Phillips.   There are rumors that Apple has been testing NXP hardware for some time.  Goldman Sachs ran NXP’s IPO last year and we know Goldman always has the inside scoop.

Broadcom bought NFC specialist Innovision Research last year.  The company just announced a new NFC chip that  sounds interesting.  It is an ultra-low power chip that doesn’t draw power from the device’s battery (Phone Scoop).  This is most likely too late for the iPad/iPhone, but should be kept on our radar.  Matter of fact, after Broadcom’s disappointing earnings last week – this could be a good time to buy.

Samsung also recently announced a new NFC chip (Phone Scoop).  Apple and Samsung have a strong relationship.  It is quite possible that Apple has been testing these parts long before the chips were announced.  The fourth company I have identified is On Track Innovations.  In my opinion, it is too small to be considered as a supplier to Apple.  However, that won’t prevent it from running up on the buzz.

My money is on NXP being the  provider for Apple’s NFC technology, but I would not count Samsung out.

Disclosure: I am currently long Apple, NXP Semiconductor and Qualcomm.  I will most likely be adding Broadcom soon.

F5 Networks on Punishment

Beaten with an ugly stick is an understatement for the shellacking F5 just endured: 2 billion in market cap; 21% in stock value gone. I listened intently to the earnings call to figure out WTF happened.  At the end of the call, I still didn’t quite get it.  However, the CEO made it clearer, at least to me, on his CNBC appearance on Thursday.

The CEO said that October, the first month of their new fiscal year, was slower than had been anticipated.  I used to work in sales, so I know exactly how the game is played.  Sales guys pull-in any and every deal possible into the 4th quarter.  From a compensation perspective, a deal in Q4 is much more valuable than a deal in Q1 and I am not talking about a few bucks.  It could be a high 5 figure difference.

I recall in 2000, a customer called me up inquiring about a product.  It just so happened that it was the last day of our fiscal year.  By the end of the day, I had closed a several hundred thousand dollar deal.  In good times that can happen.  So, when the CEO is talking about seasonality that’s what he is talking about.  I believe the improving economy allowed the sales guys to pull in more business from Q1 than they have in the past.

F5 earnings beat expectations and their revenue was in-line.  However, their revenue guidance spooked Wall Street as it was below consensus.  The CEO knew that the guidance would disappoint the street, but he had to guide conservatively.  One missed quarter could be forgiven in time, but two would be a killer.

In the interview, the CNBC reporters desperately try to find a chink in F5’s armor. However, the CEO said that he is not going to apologize for growing revenue 41% and earnings 69%.  Bottom line is that F5 is in the sweet spot.  It’s gear is essential for today’s multimedia heavy networks.  That being said, they were caught violating Wall Street’s “thou shall not disappoint” rule.  So, F5 is on punishment.  No TV or talking to friends for 3 months.  In my opinion, the stock is going to be dead money for a month or so and then it may start running in anticipation of a good Q2 report.

Disclosure:

F5 is one of five stocks I have built my mobile strategy around aka QOFAR.  I am currently long F5 in my long term account and constantly trade around that position in my short term account.

QOFAR Has the Potential to be a Home Run

Last year, I declared that the Smartphone War was over for Investors – meaning that the opportunity to make big dollars would shift from investing in mobile devices to other areas in the eco-system.  That played out as the stocks of the devices makers not named Apple significantly underperformed: Google -4.2%, Nokia -19.7% and Research in Motion -13.9%; whereas component makers like ARM Holdings +140% and network infrastructure companies like Ciena +94% had a phenomenal year.

I believe that this trend will continue and recently introduced QOFAR (Qualcomm, Open Table, F5 Networks, Apple and Riverbed Technologies) as my latest attempt to profit from this idea.  The strategy is off to a great start and is up 9.9% vs. 2.8% for the S&P 500 YTD.  I would love to annualize these gains and call it a year, but we know it won’t be that easy.

A twitter buddy who is following this call asked if I had any other acronyms to offer.  There are many other stocks that would work within this strategy. Several were listed in the QOFAR introductory blog.  My intent is to hold these five stocks as core holdings and trade around them.  Let’s see what the market’s intent is.

The chatter about Qualcomm becoming a significant supplier to Apple in the iPad 2 and iPhone 5 is increasing each day.  If this materializes QOFAR has the potential of being a home-run.

Disclosure:  At the time of this writing I am long: Qualcomm, Open Table, F5 Networks, Apple and Riverbed.  Positions may be sold at any time.

Apple Haters Wanted Jobs to Fall on His Sword – Instead They Got a Sharp Stick in the Eye

There have been fans and non-fans of companies for years – Apple, Google, Microsoft all have their Fanboys and Haters.  However, I believe the advent of blogs and services like Twitter – have taken it to a new level.  These technologies make it easier for people to express their views and few are shy about it.  The voices of the Apple Haters reached a feverish pitch this week as they demanded that Apple do a complete recall of their newly released iPhone 4.

Shortly after the iPhone 4 was released, reports started appearing on the internet about a loss of signal strength when the phone is held in a certain manner.  When Consumer Reports duplicated the death grip, as it had become known, and stated that it could no longer recommend the phone – this went beyond the blogosphere to the nightly news.  Letterman was cracking jokes.  Whoopi Goldberg, on the View,  told her audience how she stopped her car and slammed the phone in the road.  In three weeks time, this had become a major PR issues for Apple.  On July 16, Steve Jobs held a press conference to address this head on.

If you have read my past blogs, you know that I own Apple shares.  If you haven’t read my work – now you know (The Long Apple Short iKillers Trade is Working).  As a shareholder, I couldn’t be happier with the way Jobs handled the situation.  Most Apple Haters wanted Jobs to admit that he had rushed the phone to market, fall on his sword and beg for forgiveness.  Instead Jobs came out swinging with this video.

That video didn’t set the tone that the Haters were expecting, but Jobs first words were the following, “We’re not perfect. Phones aren’t perfect. We want to make all of our users happy.” So he admitted the problem and stated that every customer would be taking care of. Then he threw a curve ball.

Jobs went on the attack. He said that this problem was not unique to Apple. He showed videos of Research in Motion, HTC and Samsung phones demonstrating the exact same problem. Then he showed pictures of the company’s state of the art antenna testing facility. Over the past 5 years, Apple has invested $100M in its wireless lab.  It has 18 PhDs on staff in the antenna group.  This was not an area that Apple took lightly.

Then more data.  0.55% of all iPhone 4 users had called Apple’s support center about antenna or reception issues.  Considering that the company had sold over 3 million phones 0.55% was minuscule.  1.7% of users had returned the phone for various reasons.  Once again, minuscule.  Drop call rate – insignificant.  The number of actual iPhone 4 users complaining about this issue was hardly registering.  However, the media was calling  this antennagate.

Jobs went on to say that per Consumer Reports, enclosing the phone in a case would solve the problem.  So, Apple would provide each iPhone 4 customer with a free case.  Customers who were still unsatisfied were free to return the phone without question.  In 22 days from the first notice, with the whole world watching, Apple discovered the root cause of the problem and provided a solution.  A Microsoft Exec had the gall to say maybe this is Apple’s Vista moment.  Vista has been out 3 years and is still a piece of crap.  Give me a break.

Business is like a competitive sport. Everyday there is some out there trying to steal your market share.  Research in Motion’s stock rallied after the Consumer Reports article.  The market assumed dissatisfied or apprehensive Apple customers may buy RIMM phones instead. Jobs understands the competitive nature of this business better than most.  If you are not aggressive you will be history.  During the presentation, Jobs flipped this from a negative into an opportunity to uplift the strengths of Apple.  The antenna lab, the trivial number of returns and complaints, and Apple’s determination to make every customer happy increased the desire to buy the phone.   This not the way the Haters had drawn it up.

PS,

RIMM and Nokia both responded to Apple’s assertions after the call.  Neither were pleased that Apple positioned this as an industry problem (response).  Apparently they hadn’t gotten the memo. Eepkay ouryay eadhay inway away olehay untilway your stock gets over break-even.  RIMM’s stock is down 22% YTD.  Nokia’s down 32% YTD.  Apple’s  is up 19% YTD.

Google Takes on Apple For the People

Apple’s iPhone is the undisputed king of smartphones, but there is a swelling sentiment that Google’s Android platform may steal the crown in the end.  Baron’s

When Apple was the underdog and was having sand kicked in its face, everyone rooted for it. Now that the company is doing some of the kicking – many would like to see the transformed weakling taken down a few notches.  Interestingly, the company that is gathering the most support to deliver Apple its comeuppance is Google and they are leveraging this to the max.

“If we did not act, we faced a draconian future where one man, one phone, one carrier was the future,” he said. “That’s a future we don’t want.”  – from Google’s IO Keynote Address

Don’t like Apple’s app store policies.  We will give you a store with no policies.  Want to view Flash enabled sites on your phone – no problem.  Matter of fact, whatever that big bad Steve Jobs won’t give you – we are here for you.

In my previous life, I worked for a high-tech software company.  It is the “Apple” of its industry.  Every couple of years, a hot start-up would come on to the scene offering a better more flexible product.  Inevitably they would win some key deals and start making noise.  Interestingly, we didn’t buckle to the pressure.  The troops were rallied, innovation was sped up and the threat was taken care of.

The threats weren’t always from start-ups, but they were usual the toughest fights.  The start-ups could go full frontal, while the established companies had to protect their flanks as well.  Although Android appears to be  a frontal attack against Apple, it is far from it.  Google’s lifeblood is advertising – it doesn’t exist without advertising revenue.  Deep down Android is essentially a sophisticated version of its Adword advertising platform.  If the advertising dollars don’t materialize in mobile - Google’s on to its next project.  Look how fast they dumped the Nexus One.

At the D8 Conference, Steve Jobs made a statement that resonated with me.  He said, “All we want to do is make better products.”  Apple is responding  just like we did at my old company when under attack – speed up innovation.  The rest will take care of itself.