Whether it’s products like the Kindle and the iPhone, or the technology that powers those products, mobility is the key driver for the technology sector these days.
While the trend has been largely a consumer-based one to date, analysts expect the focus to shift to large businesses as they ramp up their IT spending in the second half of the year.
“There are many different facets to the tech recovery that will be kicking in over the next couple of months,” says Louis Miscioscia, senior analyst at Collins Stewart. “We might be getting into a very nice period for tech where we see sustained growth for multiple years.”
Right now, the demand for mobility is what’s moving technology stocks.
“If you look at engagement curves, it used to be just the desktop,” says Gene Munster, senior research analyst at Piper Jaffray. “As the hardware gets better, people are using mobile more. The hardware guys are moving at lightning speed to have better mobile products, and the Internet guys are trying to optimize mobile.”
In less than three years Apple has become the hottest name in mobile devices. Munster notes that Apple’s mobile revenue has gone from zero in 2007 to a projected 44 percent of its business in 2011.
“These are massive shifts in their business model,” he says. “The iPhone alone will be 44 percent of total sales in 2011. If you add on top of that the iPad you get to over 50 percent. That’s about $25 billion to $30 billion in total sales over a four-year time frame.”
Apple’s meteoric rise in this space is hard to duplicate. But Munster notes that some of the biggest names in the tech sector are focusing on mobile strategies for incremental growth.
“If you look at eBay , they did about 4 percent of their business on the iPhone last quarter,” Munster says. “They’re small numbers, but they’re growing quickly. We think in the next three years that can go to 10 percent.”
And while growth in online search in the United States and Western Europe is on the decline, according to Munster, Google is setting its sights on mobile technology for new revenue streams.
Google’s Android operating system gives the company exposure in the rapidly growing smartphone market. It's 2009 acquisition of mobile advertising network AdMob—recently OK'd by the Federal Trade Commission—will help leverage its cash cow, Google AdWord, into the mobile arena.
Google, however, isn’t the only company expecting big things from mobile advertising. Earlier this year, Apple purchased Quattro Wireless, an AdMob competitor, and plans to introduce its own mobile advertising platform for iPhone apps called iAd.
“We estimate that 2 percent of [Google’s] business is mobile,” Munster says. “But in the next three years mobile can go from 2 percent to 6 percent.”
Connectivity is King
Demand for mobile devices is also providing a boost for semiconductor companies focused on wireless communications, according to Gary Mobley, analyst at Benchmark Company.
Mobley notes that Broadcom and Atheros Communications , which make chips for Wi-Fi, Bluetooth, and GPS functionality in mobile devices, both have room to grow.
“Connectivity is becoming a much needed feature for cell phones,” Mobley says. “There are many carriers out there who want to offload phone conversations from their cellular networks, when possible, to a Wi-Fi network. Last year only about 9 percent of cell phones sold globally had Wi-Fi connectivity. Looking over the next four or five years, that will rise to over 40 percent.”
With smartphones quickly becoming a mainstream consumer device, the amount of mobile data consumed is on the rise. John Bright, communications technology analyst at Avondale Partners, recommends investors look at companies with a pure-play focus in specific areas of mobile data usage.
“Syniverse Technologies is a direct beneficiary of that because they handle roaming for mobile data,” Bright says. “Anytime subscribers access the Internet in a roaming environment, Syniverse stands to benefit. Not only because of the data sessions, but the sending of text messages, picture mail, and videos are unit increases for Syniverse.”
Earlier this month, Syniverse reported a 37-percent bump in its first-quarter revenue, driven largely by an increase in its roaming business.
Bright also maintains a “market outperform” rating on Nuance Communications, which provides speech recognition for mobile devices. In a note sent to investors on Monday, Bright said that as smartphone shipments continue to grow, opportunities for speech-driven search will grow along with it.
Still Waiting for the Enterprise
Late last year, analysts expectedenterprise IT spending to improve. Louis Miscioscia from Collins Stewart says that while smaller businesses have stepped up, larger companies have remained on the sidelines as the economy continues its mood swings.
“Small and medium businesses started to kick in its spending on IT in the fall,” Miscioscia says. “If you go back to ’08, SMBs were the first ones to fall off, but they were also the first ones to bounce back. They’re in a hardware refresh cycle. A lot of the products these companies use— servers, PCs, storage, and networking gear—have all aged.”
Miscisocia says that while large corporations have been more cautious, signs of economic stability should result in a corresponding increase in IT spending.
“As the economy continues to do well, companies will look to invest back in their business, and IT is a capital investment,” he says. “We’re starting to see some signs of them getting interested in spending money on IT, but it’s more of a second half story.”
Until then, Miscioscia recommends investors focus on companies with a diversified customer base.
“HP gets a third of their revenue from consumers, a third from SMBs, and a third from large corporations,” he says. “So today, two-thirds of their revenue has seen decent growth. They had 5 percent organic growth last quarter, which is pretty good for a $100 billion-plus company. We could see revenue growth better than that as the economy continues to do well.”
(Editor's note: Piper Jaffray makes a market in the securities of Apple, eBay and Google.)