Excluding cash, Samsung trades for about 7 times future earnings. What’s up with that? Samsung’s price to sales ratio is as low as 1.7, price to book ratio is 1.9, and price to cash flow is only 10. We are talking about a company that’s been growing at a double-digit rate for the last several years and is expected to continue growing at a rapid rate. Obviously, Samsung doesn’t trade like an “Apple killer” would.
What does it all mean?
So, what’s going on here? The smartphone market is one of the hottest, fastest growing markets in the world, yet, all the companies in the industry trade as if they are dying. When analysts try to justify Apple’s low price, they blame Samsung, and when they try to justify Nokia’s low price they blame Apple Inc. (NASDAQ:AAPL).
Many investors fall into this trap and stay away from one of the most profitable industries in the world. Between now and 2015, the smartphone market is expected to double. Between now and 2025, the smartphone market is expected to grow between 300%-400%. Yet, all the major smartphone companies are trading as if the market is shrinking as we speak.
Why are investors sitting on the sidelines? Because they are scared off by the analysts. Investors want to buy Nokia, but they hear analysts saying “Apple will kill Nokia.” Next, they want to buy Apple, but analysts say that “Samsung will kill Apple” and so on. Just about 7-8 years ago, Nokia was the king of the mobile phone world. Just five years ago, BlackBerry was the hot company, then Apple dethroned it and now Samsung is dethroning Apple.
The smartphone market is changing so fast that investors don’t know where to put their money. Many investors are thinking that the smartphone market will continue to change rapidly, and the major players will continue to switch sides. They want to wait until the dust settles before investing. However, it may be too late to make a meaningful profit by then.
Conclusion
Since the smartphone market is expected to grow rapidly as a whole, some investors might want to buy shares from every major smartphone company and see growth in their portfolio. This is not a bad strategy. In fact, I have been holding shares of Apple Inc. (NASDAQ:AAPL) and Nokia for a while, and I bought some BlackBerry shares recently.
In the near future, I will be also looking into Sony. Here is the thing though: you don’t want to put all your life savings into one industry no matter what. Investors should make sure to diversify their portfolios as much as possible.
Now, I can hear some readers say “what about Google Inc (NASDAQ:GOOG)?” After all, in the recent months, a lot of money flew from Apple to Google. Of course, Google Inc (NASDAQ:GOOG) will continue to benefit from rapidly growing smart phone market and it can be another good bet for the investors, even though its current valuation is not as attractive as Apple Inc. (NASDAQ:AAPL)’s. Google Inc (NASDAQ:GOOG) will still have to find a better way of monetizing Android.
Jacob Steinberg owns shares of Apple, Microsoft, and Nokia. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple.
