By ROLFE WINKLER, Wall Street Journal
R2-D2 got Luke Skywalker out of plenty of scrapes. To get its stock back to 2007 levels, Motorola needs its Droid to ride to the rescue. While the line of smartphones—named after George Lucas’s robots—has breathed new life into the company’s handset business, the key is whether the phones generate sustainable profits.
Investors currently ascribe little value to the loss-making handset business. The value of Motorola’s other businesses—selling set-top boxes, wireless enterprise solutions and public-safety communications, among other things—add up to about $4.80 a share, says Ehud Gelblum of Morgan Stanley. Add $2 of net cash and 80 cents for the networks business that Motorola is selling to Nokia Siemens Networks, and you get $7.60, just below Friday’s closing stock price of $7.75.
There are risks to those numbers. For example, the attractive public-safety business could be squeezed by state and local government budget cuts. Even so, investors seem to be getting the handset business almost for free. They will soon have to give it a stand-alone value when it is spun out along with set-top boxes early next year.
Not that long ago, Motorola minted money from phones. In 2005 and 2006, with the RAZR slicing up rivals, Motorola’s handset business generated more than $2 billion of operating profit a year, with a roughly 10% margin. But it has lost money on handsets ever since, squeezed by BlackBerries and, recently, iPhones.
The Droid offers new hope. Motorola’s handset shipments likely bottomed in the second quarter. With more sales coming from smartphones, average selling prices are up. Analyst Ittai Kidron of Oppenheimer & Co. estimates Motorola’s average handset price will top $200 this year, up from $130 last year. Co-CEO Sanjay Jha says handsets will make money in the fourth quarter.
On that score, he could be helped by rivals’ troubles. The iPhone 4 has antenna problems, while Taiwan-based HTC is struggling with supply-chain snafus. The recent release of the Droid X was greeted with long lines and sellouts.
The benefits, however, mightn’t last. Motorola isn’t the only handset maker using Google‘s Android operating system. And the Droid brand actually belongs to Verizon Communications, which also markets a Droid by HTC. That could make it tough for Motorola to differentiate its smartphones from Android rivals, which also include Samsung Electronics and LG.
Despite recent problems, the iPhone will likely remain a juggernaut, and there is talk that Verizon—currently pushing the Droid X—could offer it next year, potentially undermining Motorola sales.
Investors should be patient. If Verizon snags the iPhone, Motorola shares will likely suffer. That should provide a better entry point for those ready to take a flier on handsets.