Emerging Markets Calling

By Aaron Levitt | February 09, 2011 AAA

With market penetration rates already as high as 90%, wireless and cellular phone growth in the developed world is an anemic proposition. While advances in technology, network speed and devices will be the catalysts for advances in the developed market, new subscribers remain flat. However, for the emerging world, wireless and cellular adoption seems ripe for the picking. By focusing on the opportunities in emerging wireless world, long term investors have the ability to profit from the continued developments.

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A Budding Market
There are approximately 4.1 billion cell phone subscribers worldwide, growing from around a billion users in 2002. Analysts predict that number will continue to rise over the next few years, as new subscribers in places like Uganda, Estonia and Latin America adopt the technology. Currently, only about one third of people in developing markets have a cell phone. Southern Asia and Sub-Saharan Africa have the lowest mobile penetration rates and their citizens represent about 35% of the world's population. In 2008, these regions accounted for 32% of all mobile subscriber new additions. Analysts estimate that through 2012, South Asia and Sub-Saharan Africa will contribute 44% of total net additions.

Throughout the BRIC nations, infrastructure improvements and higher incomes are producing an appetite for more advanced wireless services. Providers are also offering more value added services, such as music, news and text messaging, to create additional revenue streams and help stimulate "phone as lifestyle" device adoption similar to the developed world.

According to the World Bank, this growth has been driven primarily by the liberalization of telecommunications markets, which enabled faster and less costly network rollout. New and cheaper cellular technologies, such as LTE and WIMAX, have also help increase wireless adoption rapidly. In 2002, the total number of mobile phones in the world surpassed the number of fixed-line telephones. Providers are now tapping into the vast underserviced rural market. The World Bank Group estimates that those four billion people who live in relative poverty have a purchasing power equating to a $5 trillion market.

Tapping this Growth
With the strong growth potential of wireless implementation in emerging markets, investors with long-term timelines may want to allocate some capital towards the sector. Both the Aberdeen Emerging Markets Telecommunications Fund (NYSE:ETF) and the iShares MSCI ACWI ex US Telecom (Nasdaq:AXTE) make good starting points. However, there are other ways to play the theme.

While China Mobile (NYSE:CHL) may be the leading wireless provider in the nation, both Linktone (Nasdaq:LTON) and KongZhong (Nasdaq:KONG) allow investors to tap into the industry of value added services in China. These companies provide downloaded games, ringtones, screensavers and other content. Investors can think of them as Apps developers in Asia.

Mobile Banking (m-banking) has been lauded as the much needed tool for helping the largely unbanked population in Africa. Currently, only 5% of the entire population has a bank account. Global wireless provider Millicom International Cellular SA (Nasdaq:MICC) operates across African nations like Chad, Ghana and Rwanda, while payment giant VeriFone Systems (NYSE:PAY) has been making headway into the m-banking market in Africa.

Finally, despite losing its mojo in the United States, Nokia (NYSE:NOK) is still one of the best hardware firms when it comes to affordable handsets. Analysts estimate that rural customers in emerging markets only have a budget of $1-2 per month for telecom services and that in order to enter these markets, handsets have to cost less than $20.

The Bottom Line
As wireless penetration rates in the developed world reach the point of saturation, investors looking for opportunities in the sector should focus on the emerging world. With subscriber rates skyrocketing there, there are many ways to play. The previous stocks along with American Tower (NYSE:AMT), which just added 3,000 cell towers in South Africa, make ideal choices to play that growth. (Evaluate the past performance before investing in these types of gadget funds. See Technology Sector Funds.)

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