3 Types of Risk Facing Mobile Stocks

By Sam MatteraFool.com

Every stock carries risk -- no company is invulnerable. Competition, market shifts, and operational failings can plague any firm, and make life difficult for shareholders. The same is obviously true for mobile stocks, but investors interested in the sector should be aware of a few unique risks.

1. Better, cheaper devicesFor handset and tablet manufacturers, competition can be deadly. When your business model depends on selling a steady stream of gadgets, a competitor with a better or cheaper device can devastate you almost overnight. With shares down more than 80% in just the last five years, BlackBerry provides a potent example of what can go wrong for firms that depend on the sale of mobile gadgets.

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This is a risk that continues to plague market leaders Apple and Samsung .

Samsung has suffered from intense competition in recent quarters. Last year, upstart Xiaomi overtook Samsung in Chinese sales. Its Mi handsets are less expensive than Samsung's devices, but offer comparable performance. Other OEMs have also gained share, and Samsung's mobile profit and its handset sales have been in decline for about a year. Unsurprisingly, its stock has fallen almost 25% in the last twelve months.

Apple has remained resilient despite increasing competition. In fact, the last two quarters were the best in the iPhone's history. In contrast to Samsung, Apple has the exclusive rights to the operating system that runs on its smartphones -- if customers want a phone powered by iOS, they have no choice but to go with Apple's hardware. Still, competition is a risk that cannot be fully eliminated. While the iPhone appears unstoppable today, it could eventually fall out of favor.

2. Subscribers defect to another carrierA smartphone is worth little without a connection. Carriers represent another key aspect of the mobile industry.

It's remarkably difficult to build a telecom company. Spectrum is limited, and expensive. Towers, satellites, and fiber cables are not cheap to install or maintain. Verizon , for example, spent around $17 billion on capex last year alone.

The risk for carriers is that they lose subscribers. Profitability is relatively easy to achieve when the total subscriber base is large and growing, but it can decline rapidly when the number of subscribers falls. Telecom companies have very high fixed costs -- spending on network infrastructure varies only slightly with the number of subscribers that they have.

While Verizon with its best-in class network has been able to easily attract and retain subscribers in recent years, Sprint has struggled to remain competitive.

Sprintwas once consistently profitable, but poor network management took a toll on the company. The carrier has lost subscribers for most of the last eight years. Profitability has been difficult to come by -- Sprint reported its only quarterly profit since 2007 last year. While Verizon shares have soared over the last 5 years -- up more than 90% -- Sprint shares have declined about 6%.

S, data by YCharts

3. Loss of supplier agreementsLike any computing platform, mobile devices depend on a wide variety of chips and sensors to function. Sometimes, these suppliers are arguably more important and definitely more profitable than the companies that actually sell the handsets.

While many Android OEMs have struggled to eke out a profit, chip giant Qualcomm -- which supplies many of the processors found in these smartphones and tablets -- has raked in billions.

At the same time, handset OEMs have often played a critical role in determining which suppliers and which technologies will succeed. Shares ofNXP Semiconductors, a company that supplies many NFC chips, have risen more than 50% since the introduction of the iPhone 6, the first of Apple's smartphones to include NFC technology. But competition is intense and the number of handset manufacturers is limited.

Qualcomm provides a recent example of what can go wrong. While it's been a great stock to own over the last five years, shares have lagged in 2015. Qualcomm's relationship with Samsung has deteriorated, which has hurt the stock. Samsung's latest flagship smartphone, the Galaxy S6, does not have a Qualcomm mobile processor -- a big change from previous models.

Other Android OEMs have remained loyal to Qualcomm, but Samsung remains the largest player in the industry. This risk is not unique to Qualcomm -- aloss of a key supplier agreement can weigh heavily on any firm's results.

The article 3 Types of Risk Facing Mobile Stocks originally appeared on Fool.com.

Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends Apple, NXP Semiconductors, and Verizon Communications. The Motley Fool owns shares of Apple, NXP Semiconductors, and Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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