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Play Motorola Both Ways


Company will likely be up on expectations, then down with reality.

When Motorola (MOT) beat Street consensus last quarter, there was a collective shout of "it's back," echoed by the number of upgrades of its stock. Much of that was predicated upon the assumption that Motorola's market share in handsets has bottomed and that, with the introduction of new Android-based smartphones in the December quarter, fundamentals and the stock are both poised to head north.

With the company expected to report third-quarter results Thursday morning before the open, I'm anticipating that the stock will follow the path of Palm (PALM) (up on expectations then down with reality) over the next quarter or so. As investors, you'll be able to benefit on the wave of good cheer that should push the stock forward. For those with real nerve, you can play the short side as well, as the cold reality sets in that happy days aren't here again.

The "market share" recovery thesis is, for the most part, based upon the assumption that things really can't get much worse. As shown in the graph below, it's tough not to agree with that assumption. In essence, Motorola has lost 75% of its market share with its annualized unit run-rate down from nearly 220 million units to about 75 million units.

It's easy to see the potential for market share gains when you see where it was versus where it is now.

Adding to the enthusiasm is the introduction of the new Android-based smartphones in the fourth quarter, led by the Droid-phone at Verizon (VZ) Wireless. There's been plenty of pre-marketing by the carrier and more than a few press "leaks" to demonstrate just how cool the device will be. Add to that, there will be no lack of effort on the part of Verizon Wireless to support this device, given their inability to effectively counter the iPhone (AAPL) thus far.

The combination of expected market share gains coupled with a great deal of smartphone hoopla should put plenty of momentum behind the stock for the next quarter or two. However, there are two reasons why I don't expect it to last for long:

First, as I wrote a few weeks ago, I don't see Android-based phones as being a big benefit for anyone other than Google (GOOG). Motorola will be just one of a number of handset OEMs selling models based upon that platform.

Despite claims to the contrary, any unique or proprietary features/functions make it less attractive to application software developers. The company wants the largest platform for its products and to have those apps consistent across all models. When the market for Android-based units gets crowded, that's when the discounting starts because there's little to differentiate upon other than price.

The second issue that's important to note regards its ability to regain market share. On its last conference call, management raised concerns over the demand for legacy products. However, the more important issue is that over the last two years, Motorola has reduced its Mobile Devices footprint by reducing operating expenses an estimated $1.8 billion. The company has reduced or eliminated infrastructure and support from a number of markets in an attempt to "right-size" its operations. Consequently, while it may see some improvement in market share, it's not heading back to anywhere near prior levels because it doesn't have the business model to support it.
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No positions in stocks mentioned.
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