The Smartphone Losers

I remember when mobile phones were the preserve of Gordon Gecko type characters. People with Spandau Ballet hair-dos, driving convertibles in the 80s.

Sure, they may have weighed a few kilos. But those original ‘brick’ cell phones were the ultimate status symbol. Exclusive, loud and rare.

A lot has changed since then.

Literally everyone now owns a mobile phone. Or smartphone, as they’re now called. In fact, there are officially more mobile devices in the world than human beings!

Kids learn to swipe through a phone or iPad almost before their first word. My own one year-old son has become adept at trying to find The Wiggles on any electronic device he gets a hold of.

I can’t help but think evolution will start to favour those with extended, nimble ‘swiping’ fingers!

And no other product has changed everyday life so much, so fast. The mobile revolution dominates the way we live, communicate and access information.

But that’s only half the story…

The knock-on effect of smartphones on other products has been equally dramatic. In a devastating way. And it’s a timely lesson on the dangers of investing in single-product technology stocks.

I’ll talk about a few of these losers shortly.

But first, take a look at the following table.

the losers of the smartphone boom

Source: CB Insights
[Click to enlarge]

You can see how smartphones have decimated some major product lines in the last 10 years.

The biggest losers

It’s probably no surprise that some big-name tech stocks are struggling with the relentless smartphone expansion. Especially single product companies in the hardware segment.

Exercise tracker Fitbit [NYSE:FIT] has fallen from a high of US$47.60 in 2015 to US$5.32. Action camera pioneer Go Pro [NASDAQ:GPRO] has fallen a whopping 92% over a similar period.

And in just the past week another well-backed fitness wearables maker, Jawbone, went bust. At its peak this company was valued at US$3.2 billion. It has burned through US$900 million of venture funds in just three years.

Not even cashed up, ‘sophisticated’ investors are safe form the smartphone dominance. And it’s not just new companies feeling it.

Even established brands have suffered. Sony [NYSE:SNE] shares are 19% down from their 2007 levels.  And a whopping 72% down from the lofty tech boom highs in the year 2000.

On the flipside

The smartphone rise has also created some big winners. Mobile gaming is one of the biggest. This market is now a US41.6 billion per year revenue business. And it’s growing fast.

Americans play mobile games more often than they watch Netflix or YouTube.

Early entrants and investors have made fortunes.

Finnish mobile game developer Supercell has grown from a small four-man startup into a US$10.2 billion company.

In just six years!

Chinese company Tencent [TCEHY:OTC] bought 84.3% of the company for US$8.3 billion in 2016.

And Tencent itself is also a big winner from the smartphone revolution. It develops many of the most used games and apps for smartphones. It’s up 35,506% since its listing in 2004.

The 24/7 nature of phone use has accelerated profits in existing big-name players as well.

Facebook [NASDAQ:FB] is up around 400% since its 2012 stock market listing. The convenience of the mobile app has kept people engaged throughout the day in a way a desktop website mightn’t have.

The take away

What’s the lessons for investors?

Well, the first one is to be careful investing in smartphone-prone areas of technology. What do I mean by that? If a company relies on selling a product that can be replaced by a smartphone, that is a big risk. And as the technology gets better, the areas that are vulnerable grow.

Secondly, you have to be very careful investing in single-product technology stocks. Unless a product has in-built innovation levers, they’re likely to continually be fighting new competitors.

On a more positive note, companies that create good products that work with smartphones may be big winners. Specialised medical add-ons may be worth looking at if they offer an advantage in a valuable niche market.

ASX listed company ResApp Health [ASX:RAP] is developing the kind of product that does just that. Its mobile phone app can detect a range of lung diseases through analysing the sounds of a cough.

It’s part of the growing field of m-Health (mobile health) that is estimated to be a US$100 billion industry by 2022 according to some research.

A possible competitor?

Will smartphone dominance remain forever? It’s hard to think otherwise. But a possible future contender is Virtual Reality (VR).

I recently had a go at a pretty simple VR device, and it blew me away. Suddenly I could understand what the hype was about.

Imagine a world of experience from the comfort of your own home. Whether its skydiving, swimming with sharks, or simply exploring a new world.

But there are practical uses beyond entertainment…

No more travelling around for meetings. You could just turn on your headset. Think of the time and effort saved. Or imagine architects showing you around their virtual creations at the pre-build stage.

And new professions may even emerge…

The world of e-Sports might be both a big user and driver of VR technology. This market grew a huge 43% in 2016 to US$463 million and is expected to double again by 2019 to over US$1.1 billion.

E-Sports consists of users battling each other in various computer games. It is particularly big in China and South Korea. And it’s even starting to become a viable profession, with big money prizes and corporate sponsorship.

VR offers an extra dimension to the game playing experience by combining the mental with the physical. To date, gaming has been done with your thumbs wrapped around a controller. VR introduces your whole body to the equation.

Perhaps VR will be the long-awaited challenger to smartphone dominance? It offers the same kind of foundational base to build upon that smartphones have provided to this point.

One thing is for sure, technology in this sector will continue to create massive winners and losers for investors in the years ahead.

Ryan Dinse,
Analyst, Money Morning

PS: Speaking of technology that’s creating massive winners and loser in the investment world, you can’t go past cryptos. They have the potential to change the very core of our financial system. But not all cryptocurrencies are equal. Some will go onto greatness and some will be monumental flops. Which is why you need a guide. To learn all about them, click here.

Ryan Dinse is an Editor at Money Morning.

He has worked in finance and investing for the past two decades as a financial planner, senior credit analyst, equity trader and fintech entrepreneur.

With an academic background in economics, he believes that the key to making good investments is investing appropriately at each stage of the economic cycle.

Different market conditions provide different opportunities. Ryan combines fundamental, technical and economic analysis with the goal of making sure you are in the right investments at the right time.

Ryan's premium publications include:

Money Morning Australia