Google Gives Motorola New Life

02/23/2010 1:00 pm EST

Focus: STOCKS

Joshua Levine

Editor, ChangeWave Investing and ChangeWave MicroCap Investor

Joshua Levine, editor of ChangeWave Investing, says Google’s new Android smartphone is a real boon to Motorola, which has struggled in the wireless market.

The ChangeWave Alliance focused on the Android operating system (OS) from Google (Nasdaq: GOOG), and discovered that consumer demand is spiking: Android is outperforming every other major competitor except for the industry leading Apple (Nasdaq: AAPL) iPhone OS.

Notably, nearly four in five Android phone owners said the Android OS was an important factor in deciding to purchase their phone. With that, the Motorola (NYSE: MOT) Droid smartphone is riding the growing wave of Android demand.

It's been several years since a Motorola phone had real market-leading momentum, but the Droid is clearly outperforming at present, and its customer satisfaction ranks second only to the Apple iPhone 3GS.

Based on recent ChangeWave Alliance surveys, an impressive 78% of Motorola Droid owners reported they were very satisfied with their Motorola Droid (and another 19% said they were somewhat satisfied, for a combined 97% satisfaction rating).

[So], the current Motorola Droid satisfaction rating ranks second only to the number-one-rated phone in the industry—the Apple iPhone 3GS (80% very satisfied).

While 31% of Droid owners said their previous phone was also a Motorola, 69% said they switched from another manufacturer, with the majority switching from Research in Motion's (Nasdaq: RIMM) Blackberry (20%) and LG (17%) models. Only 6% said they were previously using an iPhone.

Additionally, 21% of respondents reported they changed their cellular service providers when they purchased their Motorola Droid. Not surprisingly, the majority of those who switched providers came from AT&T (NYSE: T).

Back in December, Motorola registered a huge 12-point jump in future buying plans—its first increase in a ChangeWave consumer smartphone survey in three years. This surge signaled to us that MOT merited a Buy recommendation.

Motorola [recently announced] that the company plans to split into two publicly traded entities by [the first quarter of] 2011. The shares [rose 8% in the wake of the] news. (They closed below $7 Monday—Editor.)

Following the split, the two new companies will look like this:

1. Mobile & Home [will comprise] handsets, cable/IPTV subscriber and infrastructure. This business is expected to deliver $11.3 billion in sales at 1.1% margins for 2010. MOT remains confident its handset division will be at or above break-even by [the fourth quarter]. While the Mobile & Home sector is currently burning cash, the company expects both segments to be cash-flow-positive in 2011.

The fact that Motorola did not announce the sale of the set-top box business suggests to analysts that the attempted auction may have failed. And since the set-top box business is not a natural fit with the handset unit, it may still be unloaded along the way.

2. Enterprise & Networks [will include] symbol logistics products and 2G/4G/WiMax infrastructure.

Motorola estimates this division will generate 2010 sales of $10.8 billion at 14.6% margins, and it will inherit all of MOT's $3.9 billion in debt, with $8 billion in cash split between the two.

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