There is a risk that Motorola Mobility (NYSE:MMI) won’t be able to sufficiently differentiate itself as devices featuring Google’s (NASDAQ:GOOG) Android OS become commoditized. A recent Barron’s article highlighted Needham’s “Hold” rating on Motorola Mobility based on this premise. [1] The report also highlights that the company will likely experience pricing and gross margin beginning in 2012.
We have a slightly different picture of how these parameters for Motorola Mobility will trend going forward. We believe that the increasing smartphone mix will act as a support for Motorola Mobility’s pricing and margins for the next few years. Motorola Mobility’s market share has been on the decline and it is therefore important for the company to support pricing and margin levels. Motorola Mobility faces stiff competition from Apple (NASDAQ:AAPL), Research in Motion (NASDAQ:RIMM) and Nokia (NYSE:NOK) in the mobile phone market.
Increasing smartphone mix should support margins
Motorola Mobility introduced smartphones in 2009 with the launch of Droid, and since then the company has concentrated on this mobile phone category. This is evident from the fact that the smartphone mix for Motorola Mobility increased from around 17% in Q4 2009 to 44% in Q1 2011, [2] which led to an increase in gross margins from 10% in 2008 to 24% in 2010. Despite the rapid increase, the smartphone mix is still under 50%, which means there is scope left for this pace to continue. Due to this reason, we estimate that the company’s mobile phone gross margins will increase to around 32% in 2015. Beyond 2015, we expect the margins to start coming under pressure as the smartphone commodity factor will overcome the higher smartphone mix factor.
Conclusion..
We agree with the premise that the major risk facing Motorola Mobility and other licensees is the commoditization of Android platform. However, we don’t agree with the timing here, and believe that there is an opportunity for the company to continue to improve its margins for the next few years.
We currently maintain a $24.59 price estimate for Motorola Mobility stock, roughly in line with market price.
See our complete analysis for Motorola Mobility stock here
Notes:- Barron’s citing Needham as the source, May 11th 2011 [↩]
- Smartphone mix data estimated from the information provided on smartphone sales in its SEC filings [↩]
