My copy of The Economist dropped through the letter box the other day, and I was immediately struck by a front-cover headline: By 2020 80% of adults will have a supercomputer in their pocket.
Its only eight years since the first iPhone was released, and already around 50% of the worlds adults own smartphones. If that figure does reach 80% by 2020 (and its going to include the replacement of most of todays phones too), just how many chips designed by ARM Holdings (LSE: ARM)(NASDAQ: ARMH.US) will be shipped by then?
Chips with everything
Approximately 3.5 billion ARM-based chips were shipped in 2014, and that was a 20% rise on the previous year. If we extrapolate that by 20% every year, by 2020 wed be looking at almost 10.5 billion chips. With multiple chips used in each phone, that might just cover the people buying new smartphones that year and thats not considering all the other devices that will have chips in by then.
Is 20% growth per year believable? You bet it is. The same rate of growth applied to earnings would push EPS up to 72p by then, and if the ARM share price hasnt moved from todays 1,175p wed be looking at a P/E of 16.
The impact on BT and Vodafone is harder to quantify, as revenue from services doesnt scale in quite the same way both will be delivering massively more bandwidth by 2020, but the cost of each gigabyte transmitted will continue its dramatic fall.
4G is here
But with BT having bought up EE, theres little doubt it will be one of the leading providers of the mobile network itself, and of content. And its the latter that could make all the difference increasing supply of content has helped keep EPS growing steadily, and even after a 260% price rise over the past five years to 456p, the shares are still on a forward P/E of only 15 based on March 2015 forecasts, dropping to 13.5 by 2017.
Vodafone is probably the most uncertain of these three as its in the transition from from old style services (which still command nice profits in the developing world but are in decline in Europe and America) to 4G, and with the shares priced at 225p theres a P/E of a testing 35 on the cards right now.
But the technology is heading in the right direction, with 65% coverage from Vodafones 4G networks in Europe already, and 13.7 million 4G customers in 18 markets.
Which to buy?
In the long run, the opportunities are there for the picking for all three of these companies, but ARM would be my choice as the picksnshovels operator. As The Economist said, in eight short years smartphones have changed the world and they have hardly begun.
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