U.S. News

Answering The Call

null|By Christina Cheddar-Berk

The launch of Apple’s sleek new iPhone is still months away, but it already is dialing up the competition in the mobile communications industry, and creating new opportunities for investors.

Apple may be new to the cell phone scene, but rivals are viewing the iPhone as a formidable competitor. And rightly so, say analysts, who warn investors to tread carefully when picking stocks in the sector. The buzz around the iPhone launch – as well as the takeover speculation that continues to swirl around Palm – are likely to make for some turbulent times for the group.

“I think the brand equity that Apple carries right now alone is enough to make the iPhone successful,” says Andy Hargreaves, an analyst at Pacific Crest Securities, who owns Apple shares. “I don’t know if it will reach 10 million units by next year as Steve Jobs would like, but we think it will be a success, and we think that the company is not only expanding the market for smartphones, but also changing the argument from purely technical specs to one of fashion and panache.”

The design of the iPhone is expected to up the ante for cell phones as fashion accessories. In addition, it is expected to tackle perhaps the biggest issue facing the latest generation of mobile phones: How does one make smartphones that are less confusing and cumbersome even as these devices become crammed with multimedia capability to allow users to play music, watch video, take photos, send email, and surf the Web.

“I think it is a very significant event for the industry,” says Michael Abramsky, an analyst at RBC Capital Markets. He expects the introduction of the iPhone to have lasting effects on the cell phone industry as it spawns competitive technology.

The early consensus is Research in Motion, with its focus on the business user, could be best positioned to withstand the challenge. Meanwhile, Palm may have a tougher time out-muscling its larger rivals.

At the recent  CTIA wireless technology conference in Orlando, Fla., AT&T Chief Operating Officer Randall Stephenson said the phone giant's Cingular Wireless unit has already received more than one million inquiries about the iPhone on its Web site.

How this interest will translate into sales is still an unknown factor. Cingular is not taking any advance orders on the phone, which will begin shipping in June.

The iPhone has a high-end price tag: the version with 4 gigabytes of flash memory will cost $499, while the 8-gigabyte version will cost $599.

Although price will play a role in Apple’s success, the reviews also will be important. Analysts are eager to see if consumers believe the iPhone’s touch screen makes the product easier to use, and if consumers are happy with the device’s battery life.

Delayed Purchases

The anticipation does appear to have prompted some consumers to delay their smartphone purchases, says Deutsche Bank analyst Jonathan Goldberg.

“We are a little cautious about the sector right now,” Goldberg says. The analyst, who doesn’t own shares of the stocks he covers, favors companies such as Qualcomm and SirfTechnology Holdings, which supply components to the cell phone makers. He expects these suppliers to benefit no matter which phonemaker wins the battle for market share.

Wireless War Wages On

Sirf of Orlando, Fla. makes GPS chips for mobile phones. Although global positioning system devices are not a standard feature in cell phones right now, Goldberg expects this to change, boosting sales at Sirf.

Outlook For RIM

Qualcomm, meanwhile, stands to benefit from the shift to 3G cell phone technology as the demand for faster download speeds grows as phones pile on more multimedia features.

“That’s a train that is just beginning to take off,” Goldberg says.

Taking Care Of Business

Analysts also were bullish aboutRIM, the maker of the Blackberry. RIM benefits from its solid base of business users.

“It's not as difficult to defend that market. They have largely won that war," said Tavis McCourt, an analyst at Morgan Keegan & Co, who doesn't own shares of the stock.

RIM shares traded as high as $147 in late February, but were recently in the $135 range. James Faucette, an analyst at Pacific Crest Securities, says the stock could rise to about $160 within the next 12 months.

"RIM is the best positioned and doing the best in terms of showing growth," said Faucette, who doesn't own shares of the company's stock.

On the other hand, analysts see challenges for Palm. The Sunnyvale, Calif., company recently reduced prices on its Treo handsets to try to win more market share. The result was a strong increase in shipments, according to its third-quarter results released earlier this month. However, while sales gained 6%, profit fell 61%.

Takeover Talk

Also stirring the pot is speculation that Palm is a takeover target. This speculation has driven up Palm's stock price and clouded the picture for the company. Several analysts have downgraded Palm shares, saying they are fully valued at the current price.

Palm isn't expected to launch any new products in the first half of this year, but analysts are wondering what the company has in the works.

"To some degree, fashion matters," Goldberg said. "The Treo looks just like it did four years ago."

Christina Cheddar Berk is a News Editor at CNBC.com. She can be reached at Christina.cheddar-berk@nbcuni.com.