Motorola Inc.(MOT) - Hanging up on "Hello MOTO"
In the words of John D. Rockefeller, “The way to make money is to buy when blood is running in the streets”. A wise statement when it comes to investing. Early this morning, Motorola Inc. shares sank as much as 10% in heavy trading after the world's No. 2 mobile phone maker cut its fourth-quarter sales and profit forecast as handset prices fell amid fierce competition. Rival such as Ericsson, Nokia (NOK) and other generic manufacturers are eating into MOT’s profit margin. When MOT introduced the razor phone last year, it was a big hit. However, as someone once said, “technology has a shelf life of a banana”; competitors have now caught up.
Motorola has been a disappointment in the last few quarters. While “blood is not running in the streets” yet, we believed things is about to get uglier. Here’s the situation as we see it. The competition in the handset sector can be characterized as “cut throat”, meaning there’s a glut of competitors out there and they’ll do whatever it takes to move their merchandise, typically this mean cutting prices as the technological difference is no longer a factor. The lower prices results in low margin which translates into weak profit. Next, people are not trading their cell phone as often anymore because there’s very little reason to do so. To provide the incentives, manufacturers will again turns to marketing promotions and discounts, which again erodes margin. If MOT revenue is largely dependent on handsets, investors should worry.
The warning issued by MOT will be followed by downgrades in the next few weeks. As a result, we believed MOT will be trading in the mid teens in the next six months. While it is tempting to run out and buy today when the stock is down close to 10%, we recommend exercising a little patience as $16-$18/share is our recommended entry price. At $16-$18/share, we believed all the negative sentiments would have been built, which would decrease the risk of further decline. Best of Luck!
