Over the last 12 months, the NASDAQ has moved up by 17%, a respectable performance. However, most of the best-known hedge funds in the world continue lagging both NASDAQ and the broader S&P index woefully. The smartest investors in the world are having trouble matching index funds in both 2012 and 2013. Probably the biggest reason for this is the way smartphone-related stocks have underperformed. This was something that was extremely difficult to predict in early 2012. Not only has Apple tanked over the past year but other hedge fund darlings have also lagged behind NASDAQ: Omnivision, the camera module champion, is down 16% in a year and Qualcomm, the key phone chip vendor, is up by only 4%.
The smartphone market has put in torrid volume sales growth as unit growth in Q1 2013 topped 40% again. Mobile app usage has beat all estimates and an average American iPhone owner now spends 2 hours a day on mobile apps. LTE growth has been strong and the number of consumers switching to 4G phones is growing robustly every month. So on the surface, the smartphone industry is cruising along smoothly.
But what even the savviest investors in the world did not realize a year ago was that even robust volume growth and strongly increasing consumer interest in mobile content cannot guarantee stable profit growth in the smartphone world. Apple’s margins are coming down rapidly, pressured by the cheap tablet competition and Samsung’s formidable high-end smartphone roster. Tablet demand is shifting towards 7-inch models and smartphone demand is shifting towards China and India from the lucrative North American market.
In 2013, Qualcomm now estimates that China-India demand for 3G devices will be than 41 million units higher than demand in the United States. As recently as in 2012, the U.S. demand for 3G devices was 35 million units above China/India. This flip has profound implications for the smartphone industry because the hot growth segment in India right now is the sub-$100 category of smartphones.
Smartphone and tablet volume growth is no longer driven by affluent hipsters in Red Hook and Russian Hill but is instead coming from Guangzhou and Hyderabad. Markets have started suspecting that this is a game where high-tech champions like Apple and Qualcomm will have to give up fat profit margins to stay ahead. Is this an overreaction? That is perhaps the most important question in the tech stock universe for the next 24 months.
