Mobile investors are not impressed by size

Quality and not quantity seems to be the order of the day when it comes to assessing the fortunes of mobile phone manufacturers. While Nokia dominates the market by volume, companies like Apple and HTC command far racier multiples thanks to their innovation in Smartphones. Those in the middle risk being squeezed. We look at investor sentiment in Nokia Oyj (HEL:NOK1V), HTC Corporation (TPE:2498), Research In Motion Limited (TSE:RIM) (NASDAQ:RIMM), Motorola Mobility Holdings Inc (NYSE:MMI) and Apple Inc. (NASDAQ:AAPL).

The Wall Street Journal’s “Heard on the Street” column summed up the dynamics driving valuations of the mobile manufacturers. While Nokia retains its position as the world’s largest handset manufacturer, its market capitalization has almost halved in the space of a year and has recently been eclipsed by HTC. The relative newcomer has shot onto the scene, and in a year has witnessed its market capitalization grow from USD 10 billion to over USD 33 billion, according to FactSet.

The remarkable undercurrent is that HTC only shipped 24 million handsets last year, whereas Nokia shipped 453 million handsets, of which 100 million were Smartphones, according to figures from Strategy Analytics. HTC’s shares have quadrupled over the last year, partly in recognition of its healthy operating margins of 16%. Short interest has fallen from 2% of total shares outstanding on loan to 0.5% since October last year. Long only investors who lend have more than doubled holdings over the same period to 5.6% of total shares.

We last looked at Nokia following the announcement of its proposed tie-up with Microsoft in February, which triggered a 15% fall in its share price. The Guardian noted that industry analysts Gatner, IDC and Ovum predicted that the tie-up will be a success with a 20% share of the Smartphone market by 2015, moving it into second place. Some investors are not convinced and short interest has more than doubled from 2% of total shares outstanding on loan to 4.5%. However, institutional owners have retained faith and increased their holdings by 30 million shares to 20.5% of total shares.

The WSJ noted that Motorola Mobility’s return to profitability is likely to be short lived due its main US distributor, Verizon being focused on the rollout of Apple’s iPhone. It reported speculation from Stanford Bernstein analysts that the company could benefit by merging with Sony Ericson, another Google Android manufacturer, to gain market share and take advantage of cost efficiencies to boost wafer thin margins. Since Motorola Mobility’s demerger in January, short interest has risen to 3% of total shares outstanding on loan.

Research in Motion accounts for 4% of the total handset market share according to Strategy Analytics. While this is the same as Apple, the two companies face very different fortunes, with the WSJ accusing RIM of squandering its early technological lead and Blackberry brand recognition. The shares plunged in March after the company warned that its performance would be impacted by costs associated with the launched of its delayed PlayBook. While the news that RIM’s new tablet will run Google Android apps was greeted favorably, analysts questioned whether the company will sell enough units to meet growth forecasts. Short interest in the main Canadian listing has risen from 1.5% of total shares outstanding on loan at the beginning of the year to 3.7%. However, shorts have covered positions in the US listing, from 4% of total shares in January to 2%. Finally, short interest in Apple remains low and has halved this year from 0.8% to 0.4% of total shares outstanding on loan.