Selecting Smartphone Stocks

This article originally appeared Jan. 24, 2014, on Real Money. To read more content like this, + see inside Jim Cramer's multi-million dollar portfolio for FREE Click Here NOW.

We heard a few more smartphone companies report their quarterly results this week. What they are saying confirms what I have been saying here at Real Money Pro for some time. In short, the maturing smartphone market is subject to greater price competition as vendors offer more and more models at lower price points and low-cost companies such as ZTE and Huawei look to gain market share.

That means we can expect margins and earnings to come under more pressure, which makes stock selection far more critical. I continue to favor the kinds of companies that are increasing their dollar content per device. Examples include Skyworks (SWKS) and Qualcomm (QCOM), as well as Broadcom (BRCM) and RF Micro Devices (RFMD).

Nokia Disappoints

Once a mobile-phone heavyweight, Nokia (NOK) announced it sold only 8.2 million Lumia smartphones in the December quarter, down 600,000 from September. Even though Nokia sold 4.4 million Lumia smartphones in the year ago December quarter, the sequential drop from third-quarter 2013 to fourth-quarter 2013 raises questions about market share and what this could mean for Microsoft (MSFT). Remember, Microsoft will soon be the owner of the Nokia device business as the transaction is set to conclude in the current quarter.

Two signs that the smartphone bloodbath I keep talking about is heating up were the decline in average selling prices on both a year-over-year and quarter-over-quarter basis, and the return to an operating loss for the Nokia device business in the December quarter. The new owner of that business, Microsoft, reported its own better-than-expected quarter last night due to the new Xbox rollout and better-than-expected Surface tablet businesses. However, Microsoft offered little guidance on what to expect from the Nokia device business last night. Microsoft shared that its own mobile efforts saw some improvement, but I suspect we'll get a more sweeping view on Microsoft's mobile ambitions once the Nokia device transaction closes later this quarter.

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