The Biggest Red Flag for Mobile Investors

In the mobile market, there's no shortage of stocks to choose from. Device makers, chipmakers, and software companies abound. And while they may differ in varying degrees, there's one rule all of them live and die by: Innovation is key.

At the end of the day, a big red flag should go up for mobile investors who don't see their companies setting new trends (or at least following them closely) or putting out new products that change the status quo. The idea is straightforward enough, but some of the biggest and best mobile companies have failed to live by it, and a few have paid dearly.

The original iPhone changed everything, and left some companies in the dust. Source: Apple.

Lack of innovationTo lay out the case for how mobile companies miss the innovation mark, we need to look no further than how competitors reacted to Apple's first iPhone.

Back in 2007, then Microsoft CEO Steve Ballmer laughed at Apple's first iPhone, couldn't get past its $500 price tag, and said it wasn't a very good "email machine" because it didn't have a keyboard. Now, just over seven years later, Apple is the top smartphone vendor in the world.

Meanwhile, Microsoft continues to stumble through the smartphone space with just 2.8% of the worldwide mobile OS market share. The company is showing some slight signs of turning its mobile strategy around, but it's been a very long time coming.

Similarly, RIM's (now called BlackBerry) co-CEO Jim Balsillie said of the first iPhone that, "in terms of a sort of a sea-change for BlackBerry, I would think that's overstating it." At the time, he had reason to be confident. When the iPhone debuted, BlackBerry's software held the No. 3 spot for worldwide mobile OS market share, behind Nokia's Symbian and Windows Mobile. But lack of innovation and underestimating the competition crippled BlackBerry, leaving the company on the fringes of the mobile market today.

And of course, longtime mobile giant Nokia held 41% of worldwide mobile phone market same year Apple's phone debuted. Then in 2013, Nokia sold its beleaguered mobile division to Microsoft for $7.2 billion, proving that yet another former mobile giant failed to adapt to increasing smartphone innovations.

No company is immuneLess than a year ago, the web put out plenty of articles about Apple losing its ability to innovate. But since then, the company, and its stock price, has quieted most of the critics. As ridiculous as it may sound now, even Apple, with its best-selling iPhone, strong PC sales growth, a new smartwatch, and $740 billion market cap could still fail to innovate in the future, and lose its mobile footing.

That's because companies much smaller and more nimble are fighting to get to the top. Case in point is China-based Xiaomi. The company makes mid-range smartphones and tablets for much less than Apple's devices, and it's experiencing huge growth. While Xiaomi's only holds the No. 5 spot for worldwide smartphone sales right now, its overall percentage of sales jumped from 2% in Q4 2013 to 5.1% in just one year.

Competition looms around every corner, like the Xiaomi Mi 4. Source: Xiaomi.

Gartner analyst Roberta Cozza said in a report this month that, "Chinese vendors are no longer followers. They are producing higher quality devices with appealing new hardware features that can rival the more established players in the mobile phone market."

Of course, Xiaomi is nowhere near Apple's mobile dominance, but the company is a clear example of how new competitors can pop onto the scene and start grabbing market share very quickly.

That means mobile investors need to make sure the companies they're investing in aren't afraid of change. For years, Apple has willingly let its new products cannibalize its others for the sake of getting into new product categories (think of the iPhone stealing sales from the iPod and the iPad stealing sales from Macs).

For mobile companies to move forward, they have leave old technology -- no matter how good -- behind to make room for new innovations. Apple's still doing this, but if it ever stops, you can consider the red flag raised.

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Chris Neiger has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. 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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