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y 22, 1999
What's Motorola Got to Do With It?
By Joe Epstein
IF THE MARKETING machine at Motorola (MOT) is to be believed, fabulous celebrities like
Jennifer Aniston, Naomi Campbell and even Sean "Puffy" Combs are somewhere right now with
Motorola's tiny, new V-series digital cellular phone glued to their adorned ears. Attempting to
restore some of its former glory and catch rivals Nokia (NOK/A) and Ericsson (ERICY), Motorola
is pulling out all the stops to make its new gadget this year's "must-have" accessory.
The buzz around Motorola's new phone is good news, not only for investors who enjoyed an 80%
runup in the stock since the fall, but also for Alpha Industries (AHAA), a chipmaker with $117
million in revenue. Specializing in high-powered gallium arsenide chips that act as power
amplifiers for digital handsets, this former defense contractor has quietly become one of
Motorola's most important suppliers.
But not too quietly. In typical OEM fashion, Alpha's fortunes are closely linked with Motorola's.
But unburdened of Motorola's considerable baggage, shares of Alpha have, since October, left
even MOT in the dust. The stock has roared back from its 52-week low of $9 per share this fall to
nearly $40 per share, making it a natural for our CANSLIM screen.
Despite its blue-chip heritage, Motorola has become well known
over the past few years for dragging its feet in reaction to the
fast-moving wireless communications market. Early last year,
Motorola got stuck pushing its analog wireless products while
customers scooped up digital products from rivals Nokia and Ericsson, which now control 40% and 20%,
respectively, of the burgeoning $35.3 billion digital wireless market. However, Motorola, with $30 billion in
revenues, appears to be getting its act together. "Nokia is king of the heap, but Motorola is coming back
strongly right now," says Piper Jaffray analyst Samuel May. While Motorola still has a fairly limited menu of
digital products, it nearly doubled its market share last year, which climbed from 6.3% in 1997 to 11.5%,
according to research firm Dataquest. Additionally, Motorola has the most robust domestic distribution in the
industry, with 96% retail penetration compared to 78% for Nokia and just 32% for Ericsson.
The big question for investors is whether Motorola's digital phone business will continue its ascension or whether the company will stumble
again, dragging Alpha down with it. After all, Motorola has never been known for cooperating with service providers, a strategy that allowed
Nokia to partner with AT&T (T) on its hugely successful "One Rate" program and more than double its market share this year. Further,
Motorola doesn't offer a tri-mode phone (which can use analog and two separate digital standards). That's the only phone AT&T is willing to
buy, according to analysts. Although a new tri-mode phone is on its way in the next six to eight months, some industry watchers think it
may be too little, too late. "What else will be out there from Nokia and Ericsson by that time?" asks Jane Zweig, senior analyst at cellular
research specialists Herschel Shosteck Associates.
Even if Motorola continues to lag behind its European rivals, Alpha should still do very well as more and more consumers turn to wireless
communication. While Dataquest estimates digital phone sales will grow a healthy 67% this year, "whatever the forecast is, it will have to
be revised," says CIBC Oppenheimer analyst Dale Pfau. "Just take a look at subscriber numbers from the fourth quarter, and they are
generally coming out higher than anyone anticipated." More importantly for Alpha, Motorola is looking to cut costs by outsourcing more of
its chip business. While Alpha already produces 50% of Motorola's power amplifiers, analysts wouldn't be surprised if that increases,
especially if rumors that Motorola will sell off its underperforming chip business prove true.
While Alpha's stock tracks closely with MOT, the company will get a boost from going after new business with other top tier technology
companies. Already, Alpha generates approximately 10% of its revenue by providing Ericsson with switching components for its handsets.
(By comparison, Motorola represents 27% of revenues.) While Ericsson currently sources its power amplification chips from rival Anadigics
(ANAD), manufacturing difficulties at Anadigics may have left the door open for Alpha to supply the Swedish wireless company with
higher-margin chips for a new line of handsets being produced later this year.
What's more, Alpha will supply 3Com (COMS) with parts for its Palm VII Organizer, which promises users the ability to surf the Internet and
send and receive text messages in addition to its personal organization features.
Despite its bright growth prospects, Alpha isn't valued like a conventional, highflying CANSLIM stock. While analysts expect earnings to
jump 25% to 30% and revenues to climb an impressive 20% this year, the stock is trading at only 24.8 times fiscal March 2000 earnings.
Rivals Anadigics and RF Micro Devices (RFMD) trade at 74 and 64.7 times forward earnings, respectively. Even Motorola trades at 35.6
times its 1999 earnings. With a price target from Oppenheimer's Pfau of between $50 and $60 per share, maybe all those stars and starlets
are talking to their brokers. |
