“The Apple Killer” (Hilary Kramer)

By Travis Johnson, Stock Gumshoe, June 28, 2011

I haven’t sniffed out a HIlary Kramer teaser for a while, and lots of folks have been sending me the latest of her hypetastic ads, so I thought I’d dig into the one that sounded most compelling to me. The ad is for her GameChangers newsletter which, sort of in the mold of the Motley Fool’s Rule Breakers, tries to pick growth stocks with good stories — breakthrough technologies, underappreciated markets, hot consumer products, appeal to all those inscrutable people (like teenagers) who spend a lot of money but are too young to have any money to invest, etc. etc.

This time around the pitch builds on a theme that’s perfect for our upcoming Independence Day — she basically starts out with the same pitch all the newsletters are using now, that we’re all in some sort of woven conveyance that’s rapidly dropping into the center of the earth, but turns it on its head to tell us we should all be getting greedy right now. Here’s a sample:

“It’s time you heard the truth about our economy and our country. Your family, your future and your fortune depend on it ….

“The end of America as we know it is upon us.

“As with the fall of any great society, it’s hard to know what exactly will knell the death blow.

“Record deficits. Dysfunctional government. Skyrocketing food prices. A plunging dollar. The China menace. Housing collapse. Gold headed for $2,000 an ounce…

“Our country is going to hell in a handbasket.

“Surely you know this. It’s all over the TV, newspapers, magazines, the radio.

“But here’s the most shocking news of all…

“It’s all a bunch of B.S.!”

Boy, that’s a relief! I was starting to get a little worried myself — I’m afraid it will be a while before the Gumshoe family can live off of our little orchard of pathetic four-foot-tall apple trees here on Gumshoe Mountain, and, frankly, the ground is too rocky up here for me to dig a nice big hole to fill with gold coins … so I wouldn’t say I’m prepared for armageddon, necessarily, but I was a little worried.

Hilary says that’s nonsense, because “we are the greatest innovators on the planet.” Which is also a saw that we’ve heard cutting before — not to say there isn’t something to it (though how long does innovative leadership survive if we keep sending our best scientists and technologists away just because they weren’t born here, and keep glorifying the bankers and backers over the innovators? Just wondering.)

So this is her basic rationale for buying in to “America’s Great Growth Stocks:”

“We are the greatest innovators on the planet.

“It’s genetic; it’s who we are.

“It’s this uniquely American spirit of discovery, relentless curiosity and brilliant innovation that define our country’s greatness. It’s unstoppable. It’s who we are.

“American ingenuity invented the car, cured polio, sent a man to the moon and created the Internet. It gave us the iPod, laser surgery and GPS systems. American ingenuity made billionaires out of Gates, Buffett, Bezos and the likes.

“Now that same ingenuity will help us solve the biggest challenges we face—and could launch your personal fortune.

“There’s one type of company that will be leading the charge. If you want to protect and grow your money in these turbulent times, it’s the ONLY kind of stock you should invest in today.”

And the first one of these companies that she teases for us? That’s the “Apple Killer.”

Which, by the way, reminds me of Scott Adams’ great piece about buying companies you hate, like Apple — you can see it here if you missed it in the Wall Street Journal a few weeks ago. I’m still laughing. And still thinking that maybe I should buy AAPL again someday soon.

But that’s not what Ms. Kramer wants us to do — so who is this “Apple Killer?”

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Clues, please!

“I love Apple. Apple is the poster child for everything a GameChanger should be. I’ve made investors a fortune in Apple. But Apple is NOT the stock to buy if you want to pocket monster profits from soaring tablet sales over the next 6-12 months.

“Instead, buy the stock that will give Apple a run for its money.

“It’s nimble, underestimated, under the radar. And it’s one of the only publicly traded companies whose sole focus is mobile communications.

“This little gem was spun out on its own just five months ago. Its new tablet is 10 times faster, and has a major feature the iPad is missing. Plus a leaked memo shows a new lower-priced version is coming that could give it a distinct edge.

“The company is also about to unveil a game-changing hybrid that takes smartphones to a whole new level. (Imagine being able to hook your smartphone up to a docking station, mouse and full-sized computer monitor.)

“The institutional investors are waiting until the company has another earnings report under its belt. Get on board now before they pounce”

So … hoodat?

Toss it all into the mighty, mighty Thinkolator and we learn that this is … former world-changing American icon, and then laughingstock and Carl Icahn punching bag, and now rearranged to give us … Motorola Mobility (MMI), the consumer-facing half of the newly split up (well, six months or so ago) Motorola.

Yes, the same Motorola that popularized the car radio 80 years ago, and brought out the first portable phone 30 years ago and the game-changing flip phone about 20 years ago, is now trying to recover from losing their technology and popularity lead in cell phones a few years back — and the company, saddled with lots of other tangentially related businesses and a bit stuck in the morass (as far as investors were concerned, at least), split itself up and is driving Motorola Mobility to again become a hot consumer business on the back of the Droid smartphones and Xoom tablet.

That “game-changing hybrid” that Kramer refers to is the Atrix, which is an Android smart phone that uses a dual core processor and can mimic a small laptop if you dock it in a keyboard/monitor shell. The “10 times faster” tablet is the Xoom, which has had various aspects leaked over the last months — the 3G version has been out for a while, but the new-product excitement is for the Xoom2 which will run on Verizon’s 4G network and presumably offer other key features. And yes, that “major feature the iPad is missing” is the ability to run Adobe’s Flash files — something that has been kept out of all of Apple’s phones and tablets and which hurts the iPad’s ability to view some internet videos and more animated websites.

And as an anecdotal thing, here in our semi-rural enclave I do notice quite a few Android smart phones in peoples’ hands, and I occasionally see folks tapping on non-iPad tablets in the coffeeshop … and heck, I even know a few folks who went shopping for iPhones and came back with Droids or HTC Incredibles or Samsung Galaxy phones and their ilk, most of which are typically cheaper and offer a more compelling list of features and specifications, and most of which are built on Google’s Android platform so have a similar (if not as big) app universe for expansion and amusement. I tend to be very Apple-centric in my own devices so I’m probably a bit blind to their competition, but certainly Android is taking market share from the iPhone.

Unfortunately for all the competitors, though, Android vs. iPhone isn’t the real battle — the real battle is device against device on the showroom floor, and there are dozens of Androids and only one or two iPhones to choose from … so Motorola, Samsung, LG, HTC, etc. are all battling to take the smart phone business, and to a large degree they’re battling with each other over the share of the market that’s not already addicted to Apple products. Motorola seems, from my vantage point, to be doing pretty well, and their products are really cool looking (I’ve never used them), but it’s pretty early days yet.

And perhaps the best indication of that “early days” status is their income statement — they haven’t been reporting as a separate public company for very long (which is, per Hilary’s tease, indeed part of the reason why some institutional investors might shy away for now), and they seem to be in a pretty aggressive cycle of introducing new products, but they’re not really making much money yet. The stock spiked up to about $36 over the winter, shortly after becoming independent, but fell back pretty quickly after that and has traded in a slowly declining price range in the mid-$20s for the last three months or so — $22 as I type this.

The company does have a lot of cash, holding roughly half their market cap in cash, so you can certainly make a valuation argument as long as you use future estimates as your foundation, not actual past earnings. Over the past year their profit margin has hovered right around 0%, so they haven’t yet set a standard for making money, but analysts are still relatively optimistic about the year to come. The average estimate for 2011 earnings is 77 cents per share, and for 2012 it jumps dramatically to $1.63, which, if those estimates are right, would mean that buying the stock at $22 is pretty reasonable — that’s a PE of just 13 for a company that is growing at 100% this year and projected to grow about 13% a year after that, for a PEG ratio of about 1.

Then if you take the cash out of the equation it sounds a bit like a “no brainer” — backing out the net cash of $10.50 per share gives you a forward estimated PE of about 7, which is dirt cheap for a growing company. Of course, that’s all forecasting — and it’s worth noting that the estimates for this year and next have been consistently coming down over the last few months, which is not usually the sign of a stock that’s about to be the target of investor love. And it’s worth noting that even though Apple is about 50X larger than Motorola Mobility (in terms of market cap), analysts still predict that AAPL will grow more earnings by more than 20% per share in the years to come, and if you back out the net cash on AAPL’s books it also trades at a very cheap-sounding forward PE of about 10 … and analysts have recently been raising AAPL’s estimates, not lowering them.

So while MMI is certainly far smaller, has some cool looking products, and is not beloved by investors just yet — it’s hard to argue that it will really be an “Apple Killer.” Or that, in comparison, it’s even much cheaper than Apple. Motorola is, at least, in a fairly unique niche, since the other smart phone handset makers aside from Apple are either seemingly in a death spiral (Nokia and Sony Ericsson), even further back in the race (HP’s new Palm-based stuff), or part of big conglomerates and non-US-listed companies like Samsung or LG, so they can’t work well as a “pure play” on the non-Apple smartphone, but there is certainly competition in the product niche (for consumer dollars) even if there isn’t as much competition in the pure-play stock story niche (for investor dollars). I can see the argument for MMI, but I can also see how a sensible person would have a hard time buying MMI over AAPL — I don’t own either.

So what do you think? Will Atrix really be a game changer, or is the idea that folks want their phone to be their computer just silly? Will any of the Android phone makers manage to turn profits that even come close to matching Apple’s? Is Hilary Kramer right about the continuing innovation leadership that will save our economy from self-inflicted gut wounds? Let us know with a comment below.

And if you’ve ever subscribed to GameChangers, let us know what you thought by clicking here to submit a quick rating and review over at Stock Gumshoe Reviews. Thanks!

Full disclosure: As of this writing I own shares of Google, but am not invested in any other company mentioned above and will not trade in any company covered for at least three days.