Can Motorola’s Mobile Business Keep Pace in 2011?

The mobile phone industry is a highly competitive industry with players like Motorola (NYSE:MOT), Apple (NASDAQ:AAPL), Research in Motion (NASDAQ:RIMM) and Nokia (NYSE:NOK) each fighting for market share. We believe that Motorola’s declining market share, ^[1] coupled with potentially greater marketing expense, could produce downside to our $8.30 price estimate for Motorola’s stock. We estimate that Motorola generates roughly 29% of its stock value from mobile phones.

Motorola’s mobile phones have benefited from notable support from Verizon (NYSE:VZ) in the recent past, with Verizon reportedly spending $100 million on an ad campaign for Motorola’s first smartphone Droid in 2009. ^[2]

However, the situation could change once Apple’s iPhone launches on Verizon’s network, which could occur as early as Q1 2011. Not only could Motorola incur greater marketing expenses, but its already dwindling market share could come under more pressure from increasing competitive dynamics.

Gauging the Impact of Market Share Loss

Verizon has openly supported Google’s (NASDAQ:GOOG) Android operating system, as Apple has an exclusive contract with AT&T (NYSE:T) for Apple’s iPhone. Motorola has been the leading manufacturer of mobile phones on the Android platform this year, and is aiming to launch over 20 smartphones in 2010. ^[3]

Verizon’s support for Android could soften as it gears up for the potential iPhone launch, putting downward pressure on Motorola’s market share. More importantly, Motorola would likely incur higher marketing expenses in an effort to sustain its market share.

Motorola’s selling, general, and administrative (SG&A) expense as percentage of gross profits is expected to decline from a peak of 51% in 2007 to 41% in 2010, ^[4] and could continue to decline to around 31% by the end of Trefis forecast period.

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However, as Motorola is forced to spend more to promote its smartphones on Verizon, our base case SG&A estimates could prove conservative. There could be a downside of more than 15% to our price estimate if the company’s SG&A expense as a percentage of gross profits remains constant at 41% through the Trefis forecast period, instead of the decline that we currently forecast.

Increasing marketing spend is also no guarantee to Motorola’s ability to sustain market share. Motorola could face higher competition once the iPhone launches on Verizon as Verizon’s loyal users might choose to trade in their Motorola phones for an iPhone. Motorola’s market share is expected to decline from a high of 22% in 2006 to 2.8% in 2010, ^[3] and could continue to decline to 1.6% by the end of Trefis forecast period.

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There could be a downside of around 8% to our price estimate if Motorola’s market share drops to 1% by the end of our forecast period.

Should these two scenarios materialize, there could be a potential downside of roughly 25% to our $8.30 price estimate for Motorola stock.

You can see the complete $8.30 Trefis Price estimate for Motorola stock here

1. See Reuters: Motorola Shares Fall on Q1 Mobile Loss Forecast [↩]
2. See Business Insider: Verizon Spending $100 Million on its Droid Ad Campaign [↩]
3. See Seeking Alpha: Motorola Q3 2010 Earnings Call Transcript [↩] [↩]
4. Data estimated from the quarterly filings of the first three quarters of 2010 [↩]