Business Watch: HTC share price dives due to strong competition

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HTC has predicted a lack of growth in Q4. Dominic White reckons the handset manufacturer needs to refresh its smartphone portfolio quickly

Mobile is almost as fickle as the fashion industry these days – as HTC is learning to its cost.

The Taiwanese handset manufacturer has just had an absolute shocker, warning the market that, rather than growing as much as 30 per cent in the fourth quarter as it had previously forecast, it won’t grow at all.

The news sent HTC shares tumbling to 16-month lows and got analysts wondering whether the company’s fortunes could fade as quickly as they grew.

HTC’s emergence in the past few years has been as striking as its amusingly named devices such as ChaCha, Desire, Rhyme and Sensation (pictured).

Helped by its strong links to Google’s Android platform, the smartphone specialist has gone from being a cheap white-label operator to the fourth-biggest phone maker on the planet in the space of five short years.

The shares almost trebled in 12 months till April of this year and sales quadrupled in a year and a half, with the company flogging more units in the third quarter in the US than any of its competitors.

But it seems that Apple and Samsung have begun to eat its lunch in the key markets of the United States and Europe.

The iPhone has gone non-exclusive in the US, making it available to customers on multiple networks, and Samsung’s Galaxy handsets have also captured the popular imagination across the world.

With revenue warning coming as it did on the back of a similar sales warning in October, it’s little surprise that HTC shares are now down more than 60 per cent in the past six months.

The company has gone from being the darling of the sector to the dog – alongside BlackBerry maker Research in Motion – in an alarmingly short space of time.

The shares have done twice as badly as Nokia in the past six months, and some analysts are warning that if it is not careful HTC could face similar problems to those encountered by the Finnish behemoth.

“Not another Nokia”
HTC’s chief financial officer Winston Young declared to Reuters: “We are not another Nokia” – a reference to Nokia’s spectacular loss of market share to Apple and Samsung.

Asked about the share price falls he said: “I don’t think it’s so serious. We will focus on the product next year, and make it better and more competitive.

“Other than LTE [Long term Evolution] phones for the US market, we have phones for the global market. We will launch some worldwide flagship products. We’re confident in them.”

But investors are less confident, that’s if the share price and the commentary by analysts are anything to go by.

Kevin Chang, analyst at stockbroker Citi, told clients in a note that, as Nokia has shown, it can take a long time for handset makers to recover once they start missing product cycles and downgrading their guidance to the market.

Pierre Ferragu of Sanford Bernstein seemed genuinely perturbed. “This new guidance takes us by complete surprise and is at odds with recent discussions we have had with distribution channels, especially in Europe ,” he wrote in a note to clients.

Analysts don’t like it when companies come out and surprise them with sales and profit warnings. They have to explain what has happened to angry clients who have lost money and they have to rejig their complex financial models to set new, lower-price targets on the shares.

A bunch of them have just done that, with several now publicly telling clients to sell the shares and take what profits they have gleaned in recent years.

Barclays analyst Dale Gai reckons HTC hasn’t offered enough new models, and hasn’t been aggressive enough in its pricing strategy.

But others, including analyst Gartner, believe HTC is unlikely to suffer a Nokia-style collapse of revenue share despite its problems.

Part of HTC’s strategy involves fighting back closer to home in the fast-growing market of China, saying it will invest there and in other emerging markets as much as it does in Europe and the US.

But things aren’t exactly easy in China either, even though it is growing at a rate other more developed economies would die for. Huawei and ZTE Corp of China are both selling bucketloads of cheap smartphones there already.

The more pressing challenge for HTC will be to refresh its smartphone line-up more quickly and regularly and to recapture the public’s imagination with its designs and branding.

Full article in Mobile News issue 503 (December 5, 2011).

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