Cashing In on the Wireless Revolution

October 23, 2009

It doesn’t take a PhD in computer science to figure out that computers have dramatically evolved over the last half a century. But this isn’t the only transformation that has taken place—the Internet has revolutionized the way people use computers. The world wide web has fostered people’s need for immediate access to information.

It used to be that people could only get online from their PCs at home or at the office via a dial-up connection—a true test of patience—or DSL line. But thanks to the introduction of wireless broadband, people can do everything from check live stock quotes to book a table at their favorite restaurant on the go.

Mobile broadband has changed the way people access the Internet, especially in the U.S. You no longer have to be sitting behind a desk and tied to a cable—wireless devices are more convenient than that. Not only do they slip into your pocket, but you can talk on them and browse the web, and most of them have computing capabilities and a built-in GPS. These devices are also becoming increasingly more affordable.

For investors, this “mobile” trend screams profit opportunity. Here’s how you can capitalize on it:

Striking Gold with Smartphone Stocks

According to the FCC, at the end of 2007, there were 263 million mobile telephone subscribers in the U.S. (86% of the country’s +305 million population). Thirteen percent of total subscribers accessed news and information via a mobile web browser in January 2008. During that same month, 58% of smartphone users and 85% of iPhone users browsed the mobile web in the U.S.

Clearly, mobile content consumption is growing, and demand for smartphones is rising right alongside it. But not all wireless device manufacturers are created equal. Here’s how I rate three of the industry’s heavy-hitters:

Apple Inc. (AAPL) dominates the wireless device market, and by a long shot, too. The company recently blew away Wall Street’s estimates in its latest quarter thanks to strong sales of its popular iPhone. This stock gets high marks across my eight fundamental categories. I rate this stock a “Strong Buy.”

Palm (PALM) made bulky paper datebooks a thing of the past with its cutting-edge Palm Pilot personal organizer. But after experiencing tremendous growth about a decade ago, this personal electronics powerhouse was eclipsed by other gadget makers like Apple. Now, Palm is back in the driver’s seat with an impressive new Palm Pre smartphone that does it all. Last month, the company reported a loss of 10 cents a share, but thanks to the success of its new Pre model, Palm’s smartphone sales more than doubled during the quarter. I rate this stock a “Buy.”

Research in Motion (RIMM) is the brains behind the iconic BlackBerry devices that revolutionized the smartphone market. The BlackBerry is in a league of its own, much like the iPhone, and makes RIMM a force to be reckoned with. However, the company’s latest quarterly results, released late last month, fell short of analyst forecasts on both the profit and guidance front. RIMM’s biggest challenge in the months ahead will be overcoming growing competition and maintaining dominance over North America’s smartphone market. As Apple’s iPhone becomes more affordable and widely available, RIMM’s sales growth could face some pretty restrictive headwinds. I rate RIMM a “Hold.”

…and what about broadband network carriers?

People are using their phones to access the web more than ever before, and to feed this demand, new wireless applications are constantly being developed. Wireless systems must be able to handle the growing volume of data transfers (not to mention phone calls) users are generating. If investors are serious about cashing in on the wireless trend, it would make sense to invest in smartphone broadband network carriers.

It’s an interesting idea, but not the most profitable one. Take AT&T (T), for instance. This company is the broadband network carrier for Apple’s iPhone. The company just reported its latest quarterly earnings on Oct. 22. The stock beat estimates thanks to 3.2 million iPhone activations during the quarter. But that wasn’t enough to offset the declines in its wireline business, which weighed on the company’s total revenue. I rate T a “Sell.”

Verizon (VZ), the network carrier for Research in Motion’s Blackberry, and Sprint (S), one of the network carriers for Palm’s Pre, will report earnings on Oct. 26 and Oct. 29, respectively. I currently rate both VZ and S as “Hold.”

The next several months will be a telling sign if these companies have what it takes to recover from the recession’s toll. But for now, investors’ biggest moneymaking opportunity is in the smartphone makers themselves.

To find top wireless device and network carrier stocks to invest in right now, check out my Best by Sector search in Portfolio Grader.

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