The Hidden Gem of Asia's Android Boom

Tony Sagami

It's true. You have to be smart to use a smartphone.

It is also true that my smartphone is a lot smarter than I am because I've yet to figure out how to use all of its bells and whistles.

Smartphones are the newest generation of mobile phones that can do a lot more than simply make phone calls and send/receive text messages. Besides offering advanced computing ability and connectivity, smartphones play music, take pictures, surf the internet, send/receive email, voice dial, have GPS services, synchronize with your PC, and have word processing and video game applications.

According to ComScore, 45 million out of the 230 million mobile phone users in the United States have smartphones. An impressive 20% of all new phones sold in the United States this year have been a smartphone.

The key to understanding the smartphone market is to think of it like the computer industry where you have both hardware and software suppliers. For example, while Dell and Hewlett Packard have dominated the hardware side of the U.S. computer industry, Microsoft has enjoyed close to a virtual monopoly on the software side.

Mobile phones have the same division. You could try to figure out who has the best hardware (the mobile phone itself) or simply invest in a company that makes the best operating system (the software).

Android: The Smartphone Software Winner

Regardless of the popularity of the Apple iPhone, the clear winner of the mobile phone software industry, in my view, is the Google Android operating system.

Android? I always thought that androids were robots that looked like people, like the ones in The Stepford Wives or The Terminator. But Android is a new catchphrase in the mobile phone industry, and understanding it is going to put a lot of money into your pocket.

Nearly half of all smartphones sold in China in the last  quarter run Android.
Nearly half of all smartphones sold in China in the last quarter run Android.

Android describes a new open-source operating system for mobile devices such as cellular phones, tablet computers and notebooks. Android was developed by Google. The Android platform has been pumping out some impressive devices lately.

Android is based upon a modified version of the Linux operating system. Google has joined forces with dozens of other mobile phone vendors to form the Open Handset Alliance, which is tasked with the development of Android around the world.

Members of the Open Handset Alliance include: Google, Dell, Motorola, Qualcomm, Texas Instruments, HTC Corporation, Samsung, LG, T-Mobile, China Mobile, NTT DOCOMO, Sprint Nextel, eBay, Wind River Systems, Broadcom, NVIDIA, Marvel Technologies, Vodafone, SoftBank, Garmin, Sony, Toshiba, Acer, China Unicom, ASUSTeK, and dozens of others.

Application Explosion

That collaboration among dozens of companies has resulted in an explosion of Android applications. There are more than 100,000 Android software applications being offered, and that number is growing every day.

That big menu of application services is driving sales of Android-based phones. Sales for Android-based smartphones are ranked #1 among all smartphone operating systems sold in the United States in the second and third quarters of 2010 with a 43% market share, outselling other top smartphone operating systems from Research in Motion's (RIM) Blackberry OS and Apple's iOS.

Even though Android sales on are fire, it is still playing catch-up.

  1. RIM 35.8% of the total market (down from 39.3% in July)
  2. Apple has 24.6% share (slightly up from 23.8% in July)
  3. Google Android 23.5% market share (way up from 17% in July)
  4. Microsoft's share fell from 11.8% in July to 9.7%
  5. Palm, owned by Hewlett Packard, 3.9% (down from 4.9%)

Those above numbers are for the U.S. market, but Android phones are selling even faster in China. Nearly half of all smartphones sold in China in the last quarter run Android. Android now represents nearly 50% of smartphone volume in the country, up from zero last year.

The Best Way to Profit from the Android Boom

Clearly, Android-based phones are red hot. The question is: What is the best way to profit from the growing popularity of Android phones?

According to comScore, Samsung is the top manufacturer of smartphones closely followed by LG. But there is a hidden Asian gem that is the biggest winner of the Android boom.

I'm talking about a Taiwan company named HTC Corporation (2498.TW). You've probably never heard of HTC, but don't let that bother you. I'd be surprised if many of my Wall Street peers have heard of it either.

HTC, formerly known as Hong-Ta Corporation, is the world's largest maker of handsets using Google Android operating systems. It is an OEM (original equipment manufacturer) for T-Mobile, Verizon, Vodafone as well as its own Qtek brand.

HTC's profits in the third quarter jumped by 95% on extremely strong demand that drove sales to a new record. Third-quarter profits hit $360 million, well above the $303 million forecast of 16 clueless Wall Street analysts.

Those numbers should get even better because global sales of smartphones are expected to climb by 55% this year to 270 million units.

Novatek Microelectronic (3034.TW) provides chips that run the display screens on HTC phones and chips used in Apple iPhones. Novatek Microelectronics is also enjoying record sales.

HTC trades on the Taiwan Stock Exchange (2498.TW) or the over-the-counter market (HTCXF.PK) and is currently in the low $20s.

Is it a screaming buy today? As always, timing is everything when it comes to investing, so you'll need to do your own homework. I would suggest, however, that you wait for HTC to go on sale before putting any new money into it.

HTC Corp.

I believe that HTC will be a very big long-term winner of the mobile phone horserace and a long-term stock market winner.

Best wishes,

Tony


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Posted 12-13-2010 12:59 PM by Tony Sagami
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