Research In Motion
( MOT) are direct beneficiaries of consumer demand for smartphones, but investors should also consider component makers.
It's easy to forget that the company whose name is stamped on the front of a smartphone didn't make everything buried beneath the shiny touch screen. The guts of most phones are an amalgam of chips and circuit boards from smaller companies around the world that are better suited to produce the nuts and bolts of technology than the finished product.
Companies such as
, a supplier of connectivity chips for Research in Motion, and
, which makes processors for the
( PALM) Pre, are good examples of the auxiliary beneficiaries of the smartphone boom.
While those companies may not enjoy the same sort of margins or name recognition that the designers of the phones do, they capture huge contracts by landing smartphone-chip deals.
The hush-hush nature of smartphone subcontracting makes it difficult to determine the profitability of the orders. Many times, suppliers are identified only when a phone is torn apart by research companies.
Chipmakers such as
, which is the envy of many since it supplies Apple with the chips for the iPhone, could be attractive derivative bets on the smartphone market. Still, a broader type of technology offers greater opportunities for growth due to universal applications.
Qualcomm, in particular, is an interesting stock to play the smartphone industry. The company's Snapdragon processor has found its way into Google's Nexus One and HTC's upcoming EVO 4G. It's widely regarded as one of the best options available to phone makers. Qualcomm's stock has fallen 23% in 2010, so this could be a good time to get in on the chipmaker.
Printed circuit-board makers like
also create components for phones, but their products are so generic, they can be used in literally anything electronic. That means diversification benefits.
Jabil and Multi-Fineline look more attractive based on valuations and performance over the past year. Both companies have PEG ratios of less than 1, indicating they're undervalued based on projected growth. Jabil has seen its forward price-to-earnings ratio fall to just 8.5.
Smartphones will make people other than just Steve Jobs rich. Other benefactors can help investors play multiple sides of this trend. Consider processors and printed circuit boards as the supporting cast members.
-- Reported by David MacDougall in Boston.
Prior to joining TheStreet Ratings, David MacDougall was an analyst at Cambridge Associates, an investment consulting firm, where he worked with private equity and venture capital funds. He graduated cum laude from Northeastern University with a bachelor's degree in finance and is a Level III CFA candidate.