MMI: Needham Starts at Hold; How Soon A Commodity?
By Tiernan Ray
Charlie Wolf of Needham & Co., who last week cut his rating on Research in Motion (RIMM) to Hold for its failure to maintain competitive products, today initiated coverage of Motorola Mobility (MMI) with a Hold rating, writing that Moto’s strategy of riding Google’s (GOOG) “Android” coat-tails could become increasingly risky this year.
There are two risks, as he sees it: there will be a proliferation of smartphone licensees of Android (some would say there are already a plethora), and, closely tied to that, there is a risk that Moto won’t be able to sufficiently differentiate itself as Android devices become commodities.
Moreover, he sees the same risk to Moto’s efforts with Android tablets, despite the fact that its “Xoom” tablet has gotten positive reviews so far.
“Since Android phones run on the same operating system, the major risk facing Motorola and the other licensees is the Android platform could commoditize, sending margins into value-destroying territories.”
Because smartphone growth is exploding, and because the devices are sold through carriers, subsidies have kept Android from commoditizing — meaning, no one buys them on price alone, he implies. As smartphone growth slows, Wolf expects carriers to press Moto and other vendors for lower prices on a wholesale basis.
He notes, “Google has licensed Android to over 40 manufacturers; and the only option for many second-tier licensees, located in emerging markets, is to capture share through aggressive pricing rather than differentiating features and services.”
On the strength of 20% revenue growth, Motorola Mobility should earn $0.85 in 2011 as the company leverages the fixed components in its expense structure. We do not anticipate that Motorola Mobility will experience smartphone sales shortfalls or increasing margin pressures in 2011 because the Android platform itself is growing so rapidly. However, 2012 could be a different story. We expect Motorola Mobility’s revenue growth to slow to 15% in that year. We also expect that pricing and gross margin pressures will begin to emerge as growth in the Android platform slows. With little additional leverage available in its expense structure, Motorola Mobility’s 2012 earnings should rise modestly to $1.10 per share.
I would note Wolf’s estimate is higher than the 80 cents analysts are estimating this year, but the 2012 figure for $1.10 is well below the consensus $1.70.
Moto shares today are down 41 cents, or 1.6%, at $25.13.
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