Rumble In The Jungle

In the smartphone market, business looks robust for the next four years, at least according to a recent International Data Corporation (IDC) report. There's a bit of history and mystery in the IDC findings because not only do they compile statistics for 2011/2012, but they also project smartphone shipments to 2016. Data extrapolation is not an exact science, but IDC's business is making prognostications, so I'll pay attention to what they have to say -- especially since it may effect the holdings in my portfolio.

Top Five Smartphone Markets (based on shipments)

Country	2011 Market Share	2012 Market Share	2016 Market Share	2011-2016 CAGR
PRC	18.3%	26.5%	23%	26.2%
USA	21.3%	17.8%	14.5%	11.6%
India	2.2%	2.5%	8.5%	57.5%
Brazil	1.8%	2.3%	4.4%	44%
UK	5.3%	4.5%	3.6%	11.5%
Rest of World	51.1%	46.4%	46%	18.1%
Total	100%	100%	100%	20.5%

Source: IDC Worldwide Mobile Phone Tracker, 2012 Q2 Forecast Release, August 30 2012

As stated in the press release, the big player going forward will be China: "Strong end-user demand and an appetite for lower-priced smartphones will make China (PRC) the largest market for smartphones this year, overtaking the United States as the global leader in smartphone shipments.".

Although worldwide smartphone market share in the United States is expected to decline to 14.5% by 2016, don't forget about the tablet, its larger touch screen cousin. Forrester's Sarah Rotman Epps put out some figures a few months ago:

We now expect 112.5 million US adults to own a tablet in 2016, which will equal 34.3% of US adults. In Europe, the numbers are similarly impressive, with an expected 105.7 million tablet users, or 30.4% of consumers 16 and older, in the EU-7 by 2016. With an assumed replacement rate of two years, cumulative unit sales will be much higher: In the US, we forecast that consumers will buy 292.5 million tablets from 2010 to 2016.

My investing action plan of buying platform agnostic companies in the tablet and smartphone space is on the up-and-up if these research reports are remotely correct in their assumptions. However, I still believe it's the growth in China that will take the wireless broadband infrastructure sector to a higher level. Initially, it will be the smartphone market that may be the catalyst.

As reported by IDC analyst Wong Teck-Zhung:

Looking ahead, the PRC smartphone market will continue to be lifted by the sub-US$200 Android segment. Near-term prices in the low-end segment will come down to US$100 and below as competition for market share intensifies among smartphone vendors. Carrier-subsidized and customized handsets from domestic vendors will further support the migration to smartphones and boost shipments. Looking ahead to the later years in the forecast, the move to 4G networks will be another growth catalyst.

The Chinese do business differently than we do, just like in many other foreign markets. You've got to grease the palms of the party bosses in the PRC, similar to the payola schemes in Mexico. It doesn't pay to be the "Ugly American". It's better to implement money making strategies in foreign countries by their rules.

This bodes particularly well for three companies I have shares in: Velti (VELT), Glu Mobile (GLUU), and CEVA (CEVA). All three organizations have significant relationships in the PRC. The trio are also internationally positioned, which will increase business in whatever continent they are operating.

There is open warfare between Apple (AAPL) and smartphone manufacturers which utilize the Android (GOOG) operating system concerning hardware patent issues. This is a domestic problem in its current form. The recent decision against Samsung may go as far as The Supreme Court. No matter what happens, it still won't stem the tide of smartphone and tablet adoption globally. From my vantage point, this is a sector that is about to detonate, if not by the New Year, then certainly by Summer of 2013. China will play a big part.

Facebook: From Headliner To Also-Ran

It's fairly well documented that the Facebook (FB) IPO opened to much fanfare with praise such as: "once-in-a-lifetime opportunity", "history in the making", and "it will make you money hand-over-fist". The masterminds on Wall Street priced it at $38, only to see it be cut in half a few months later to $19. I picked up a small piece of the action today for inclusion in my portfolio. This was not a spur-of-the moment decision.

Granted, the stock is in need of divine intervention to stop the slide, especially after the media firestorm of late. Out of all the bear articles I have read, Henry Blodget's piece was probably the most informative and well balanced. Both Mr. Blodget and ValueLine cautioned that until November 14th, more lock-up restrictions will expire with approximately 1.5 billion shares flooding the market. Things turned from bad to worse when board member Peter Thiel unloaded 72% of his remaining shares for a cool $400 million last week. Obviously the honeymoon period is over.

If we tabulate the earnings estimates, it's easy to see the stock is overvalued when compared to large cap technology companies like Apple (AAPL) and Google (GOOG). The average annual earnings estimate for 2012 is $.55/share. The high projection is $.76/share and the low is $.48. Just using the low estimate, we get a P/E ratio of 38. Apple and Google have P/E ratios in the mid teens. However, one thing that differentiates Facebook from Google and Apple is that it is a massive communications system. Sure, Google has Google+, but that is an upstart. Facebook is the proven leader.

Facebook is no longer a hot startup, but their 3-5 year growth projections of 27% indicates they still have a lot of mojo left. Where I think the anomaly is, and one of the reasons why the stock is under so much pressure, is the growth for the current year is only 14%. Going out to 2013, projected growth jumps back up to 28%. With anticipated earnings per share of $.63, you get a much more reasonably valued security with a P/E ratio of 30, which would give it a PEG ratio of one. Granted, this projects out 16 months, but analysts usually start utilizing next year valuations in the Fall.

One of the big knocks on Facebook is that they are primarily a desktop phenomenon, and can't monetize their mobile-phone application. That may be true for the last quarter, but in their first conference call, CEO Zuckerberg, put mobile as the company's number one priority:

As of the end of June, 543 million people were actively using our mobile services every month, each month. That's 67% more people than the 325 million who were using our mobile services just a year ago. We've also found that people who use our mobile services are more active Facebook users than people who only use our desktop services. On average, mobile users are around 20% more likely to use Facebook on any given day. So mobile not only gives us the potential to connect more people with our services, but it also gives us the ability to provide more value and a more deeply engaging experience.

The 543 million mobile users is hard scientific data. Facebook has the number one mobile app in the world. I think if you take the big picture point of view, you can see that there is tremendous opportunity for them in the mobile space.

How they go about doing it, is something that the CEO and his team are in the process of figuring out. They've done a terrific job of gaining digital dominance by building customer loyalty. My bet is that they will right the ship in regards to advertising on the mobile platform before the next conference call slated for the end of October. That's before the lockup period expires, which may stem the bleeding, if not propel the stock upwards.

However, I don't think they can do it alone. From doing extensive research in the mobile broadband arena, my preference is to see them team up with a digital-agency like Velti (VELT), or Millennial Media (MM). In 2010, Google bought Admob, and, Apple scooped up Quattro, which are both in mobile advertising. To the best of my knowledge, Quattro is only on the iOS platform, and Admob will have a difficult time in China because they are after all a Google company. Facebook is an international company with a mobile app that is platform agnostic. They require an advertising partner with similar credentials. Velti is the most globally positioned of all the mobile agencies.

Just going by Yahoo Finance analyst opinions, out of 22 brokers that cover the stock, $23 is the low twelve month target price, while $45 is the high target. Even if the equity rises to the $23 level by next August, that's a 25% gain. I'll take that in a choppy market, and that's the most negative outlook. I don't like to haggle over price too much. It's tough to pick a bottom. I believe that in a year from now, I'll be very happy with a $19 entry point. My investing style is to try and identify stocks that may double in two to three years. Facebook fits the bill.

This is when I like to buy recent IPOs, when they have sold off. It's one of the many teachings of Peter Lynch, one of the best value investors in the past 50 years. Nobody likes Facebook now. They bring a lot of baggage with them, but they still are the number one social Web site in the pixelated universe. Although Facebook needs a shot-in-the-arm, I believe it's coming sooner than later. Mr. Zuckerberg may not have the vice-grip control on the business he did two years ago, but he's the Chief Executive Officer - he writes the checks. It's up to Zuckerberg to make things right for a publicly traded company.

CEVA Fine Tunes Their Operation For 4G LTE

According to a recent presentation sponsored by Barclays Capital, CEVA (CEVA) is the world's leading licensor of DSP (digital signal processing) cores and platforms with a 90% market share. DSP essentially helps translate analog signals to digital and vise versa. Two other main engines in the cell phone are the CPU, brought to you by a company like ARM Holdings (ARMH), and the GPU for graphics processing, in which Nvidia (NVDA) excels.

The over-arching theme of my writings and stock selections since January 1st, has been in the wireless broadband sector. Anything to do with smartphones and tablets. My impression is that this a market worth cultivating, and in the next two to three years, may grant me a bigger paycheck. I'm primarily in small caps like CEVA to take advantage of the potential growth in a sector that is the driving force behind much of the technology expansion.

What I want to concentrate on is 4G LTE growth for CEVA. This is where the technology is going. Just look at all the television commercials we are being bombarded with by the likes of AT&T (T), Verizon (VZ) and Sprint (S). CFO Yaniv Arieli sheds some light on what could be a very profitable market, not just for CEVA, but their partners, too, at the Barclays Capital Conference:

"The next growth driver for us is the movement from 3G to LTE. Samsung, Broadcom (BRCM), Intel (INTC), Mindspeed (MSPD), all of these guys are using us not necessarily anymore for just cell phones. We have design wins in base station. We have design wins in smart grid. The volumes could be quite big in these markets, and if you look at the LTE subscribers today from 12 million anticipated to grow to north of 700 million over the next three years."

In addition, CEO Gideon Wertheizer discusses some impressive developments in 4G LTE in the latest conference call: "On 4G LTE, we continue to make progress in terms of customer attraction and design wins in this lucrative market. With the additional agreements we signed during the second quarter, we now have more than 20 LTE design wins with our DSPs.".

As semiconductors consolidate, CEVA is now moving into imaging, vision, audio and voice type of functionality. Battle lines are being drawn. This is because what was once a fragmented market is now solidifying, "...which is being driven by big OEMs vertically integrating and developing their own chips. This is evident in OEMs including Samsung, Apple (AAPL) and Huawei, integrating their own chips into their smartphone designs.".

The CEO goes on to say: "An example of this strategy coming to fruition is the strategic agreement we concluded during the second quarter with a Tier 1 OEM, who claims to use our DSP cores across a range of LTE products, ranging from mainstream LTE smartphone to next generation LTE advanced designs. For confidentiality reasons, we cannot elaborate more on this important deal at this time.".

When pressed further on this issue during the Q&A session by an analyst, CEVA's management didn't pin down an exact number of how many Tier 1 OEMs have licensed their LTE technology, but said it was in the range of two to three. This is great going forward, but LTE isn't expected to ramp up until late 2013, or the beginning of 2014. They need to pay the bills somehow, and that will be done via the already existing 2G and 3G initiatives.

Although in the most recent quarter, the 2G market experienced pricing pressure, CEVA's volume growth in the expanding 3G market during Q2 significantly outpaced that of the overall 3G space, as low and mid-range 3G smartphones gained traction, as paraphrased by Mr. Wertheizer. That's all well and good, but Wall Street didn't like CEVA's progress and the stock continued to trade near its 52 week low after the conference call. I took the opportunity to add to my holdings.

My median price for the equity is $19 (it currently sells for about $17). I originally bought CEVA at $22/share, and dollar cost averaged down at $15 when I liquidated my position in Sequans Communications (SQNS) two weeks ago. Both Sequans and CEVA are in the 4G LTE space, but Sequans has too many red flags for me to stick with it. With a much-needed cash infusion, and the thought of my assets being vanquished, I decided to part ways with the company. However, I will be monitoring it to possibly go back into it in 2013.

Although I like and own CEVA, a basic sticking point with the equity is that it appears to be overvalued if you look at the P/E and PEG Ratios. Sure, it's down almost 50% from its 52 week high, but the numbers don't lie. There's a lot of white noise in day-to-day investing with the barrage of information investors get from the numerous media outlets. I prefer to go year-to-year when doing evaluations, and according to Yahoo Finance, the measurables don't appear to be bargain basement.

Average analyst earnings estimates for 2012 are $.80/share. That's a P/E of 21. Extrapolating out to 2013, the average earnings go up about 13% to $.91/share. Next year's P/E calculates to 19. That's not a blue light special. If we examine revenues, sales for next year are only supposed to grow at 8.4%. Nothing to write home about.

So why would I want to be in a stock like CEVA? I like their prospects going out three to five years. I think I can double my money, if not more. Although reasonably valued, divinely ordained equities like Apple and Google (GOOG) have too big of a market cap to be included in my personal portfolio. Granted they have superior operating systems, but the law of probability, combined with the law of large numbers, may have caught up with these celebrity status stocks. Both companies are not quite long in the tooth, but not quite nimble enough to do anything more than double in the next couple of years.

Doubling your money is a terrific return for any investor, but I believe my best bet is to allocate my resources to their lesser known contemporaries. Stocks that may triple or more because of the success of Apple's iOS and Google's Android operating systems. It's a profitable arrangement for everybody betting on the sector.

With clients like Broadcom and Intel (INTC) licensing CEVA's technology, it is difficult to determine when the stock will get back in motion. However, with the upcoming release of the iPhone 5, all securities in the wireless sector may get goosed. I'd rather be early than late. My view is that investor psychology may play a big role in wireless broadband companies.