Smartphones Boost Motorola’s Profit Margins

Motorola’s fortunes are improving as more consumers choose pricey smartphones over more basic handsets. In its second-quarter earnings announcement, the company reported that its overall profitability had improved, mainly due to better profit margins on mobile phone sales.  The mobile phone business constitutes 27.4% of Motorola’s share value according to our estimate.

Motorola (NYSE:MOT) competes mainly with Apple (NASDAQ:AAPL), Research in Motion (NASDAQ:RIMM) and Nokia (NYSE:NOK) in the mobile phone market. We believe that Motorola’s margins will continue to improve as the company launches new smartphones with enhanced features. As a result  we are raising the Trefis estimate for Motorola’s stock price from $7.42 to $8.39. Our analysis follows below.

Smartphones equal profits

Motorola started selling smartphones in the fourth quarter of 2009. The proportion of smartphones in Motorola’s mobile phone product mix has risen steadily since then, from 17% in Q4 of  2009 to 27% in Q1 of 2010 to 33% in Q2 of 2010.

Smartphone profit margins are higher than those of regular mobile phones. As a result, Motorola’s mobile phone business has grown more profitable over the past three quarters. We now expect profit margins to reach 28% for 2010, up from 18% in 2009.

You can drag the trend-line in the chart below to create your own margin estimate for Motorola’s mobile phone division and see how it impacts the company’s stock price.

Based on current information, we expect Motorola’s mobile phone margins to reach 34% by the end of the Trefis forecast period. In the event that margins reach 40% by 2016, there could be an upside of 5% to the $8.39 Trefis price estimate for Motorola’s stock.

New phones on the way

Motorola plans to launch 20 new smartphones this year. The company expects to sell 12 to 14 million smartphones in 2010. Motorola added the following four smartphones to its portfolio in the second quarter:

1. Droid X: After the success of Droid, Motorola launched Droid X in July 2010 on Verizon’s network. It offers a better browsing experience and more security features for enterprises.
2. I1: This robust smartphone can survive harsh environments. It’s based on Motorola’s push-to-talk technology on the Sprint network.
3. Flipout and Charm: These two phones are based on Motorola’s Motoblur operating system, which is optimized for social networking. In another article, we discussed how Motoblur OS could help slow the decline of Motorola’s mobile phone market share.

You can see the complete $8.39 Trefis Price estimate for Motorola’s stock here.