iPhone Still Can't Beat Old-School Phones

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BOSTON (TheStreet) — I don't care if you can watch movies on your Apple (Stock Quote: AAPL) iPhone or send tweets from your BlackBerry. Most people still prefer traditional cell phones, the kind that can't do much more than call and text.

Cell phones make up 80% of the U.S. mobile phone market , according to research firm comScore. Smartphones — devices that can do everything from track Facebook updates to locate the closest restroom — are slowly catching up, but don't expect the balance to flip anytime soon.

When service providers sign up new customers, they usually give them a free cell phone, not a smartphone. That might change as cheap smartphones flood the market, but it won't eliminate a simple fact: Many people don't like smartphones.

Early adopters jumped on the smartphone bandwagon when they bought their first iPhones in 2007. Even though millions of people have joined them, the remainder will take much longer to switch to these new phones. Technophobes and conservative customers will likely stick to traditional cell phones because they're cheaper and easier to use.

The biggest competitors in the smartphone wars, including Apple, Research In Motion and HTC, either don't make or are phasing out standard cell phones. As a result, makers of standard cell phones might face less competition, allowing them to generate revenue from loyal customers who don't want to adapt to the new, new thing.

According to comScore, three-quarters of the cell-phone market is divided almost evenly among LG, Motorola (Stock Quote: MOT) and Samsung. The next closest competitor, Nokia (Stock Quote: NOK), has about 10% of the market. Unfortunately for most investors, LG and Samsung aren't traded on U.S. exchanges, so getting your hands on the shares could be tricky. Motorola, on the other hand is available, but the shares are expensive.

Motorola's price-to-earnings ratio of 31 versus an industry average of 23 suggests the stock is overvalued. Its PEG ratio, a measure of value based on expected growth, is also unappealing at 4.3. A PEG ratio that's less than 1 indicates a bargain.

Investors may be better off with Nokia, which may not control as much of the standard phone market, but remains a big player. The company's smartphone business is also thriving, an added bonus. Nokia's P/E ratio of 14.8 and PEG ratio of 1.5 make it more palatable.

Smartphones are driving growth in the phone industry, but companies that sell traditional cell phones can earn easy revenue with dwindling competition by following a simple mandate: Create a solid phone that makes and receives calls well. This segment requires little research and development, and should be around for a long time to come. Diversification within an industry should not be overlooked.

If you have access to a foreign exchange, Samsung and LG are worth further investigation.

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