Bloomberg News

Motorola Mobility Short Interest Triples on Android Battle

June 30, 2011

(Updates with closing share price in fifth paragraph.)

June 30 (Bloomberg) -- Investor bets against Motorola Mobility Holdings Inc. have more than tripled since January as the mobile-phone company faces rising competition from rival handset makers that use Google Inc.’s Android operating system.

The company, based in Libertyville, Illinois, had short interest of 15.9 million shares on June 28, compared with 4.9 million on Jan. 10, according to the New York-based research firm Data Explorers. Shorts represent about 5.4 percent of the shares outstanding, about double the 2.6 percent average for the Standard & Poor’s 500 Index, the data show.

The bearish bets may reflect growing concerns about Motorola’s profitability as it competes with Apple Inc. and an increasing number of companies that use the same Android software it does, said Tero Kuittinen, an analyst at MKM Partners LLC. The range of Android smartphones, from companies such as Samsung Electronics Co. and HTC Corp., makes it difficult to stand out, he said.

“People are anxious about the profit picture in the Android space,” said Kuttinen, who is based in Stamford, Connecticut and has a “buy” rating on Motorola. “People are skeptical about Motorola’s ability to hike the margins.”

Motorola Mobility, which makes mobile phones and set-top boxes for cable television, was spun off from Motorola Inc. this year and has lost a third of its value since it started trading Jan. 4. The stock rose 4 cents to $22.04 at 4 p.m. in New York Stock Exchange composite trading.

In a short sale, a trader borrows shares and sells them. If the price drops, the trader profits by buying back the stock at a lower price, repaying the loan and pocketing the difference.

Android Challenge

Chief Executive Officer Sanjay Jha, who was hired from chipmaker Qualcomm Inc. in 2008, stabilized the handset business by cutting costs and focusing on Android, making it one of Google’s early supporters. Android is available for free from Google though, and it has been adopted by traditional mobile- phone makers that want to offer smartphones capable of browsing the Web and running software programs known as apps.

Besides Samsung and HTC, LG Electronics Inc. and Sony Ericsson Mobile Communications AB offer Android phones. All four of those companies are likely to ship more phones than Motorola in the current quarter, said Tim Long, a BMO Capital Markets analyst.

Motorola Mobility, whose stock ticker is MMI, “had a first-mover advantage, but now Samsung, LG and Sony Ericsson have joined HTC, and we expect each to out-ship MMI,” said Long, who cut his rating on Motorola to “underperform” on June 27 and dropped his price target on the stock to $19 from $26. Of 38 analysts who track the stock, 21 recommend buying it, 12 rate it a hold, and 5 suggest selling.

Innovation Effort

Jha has been pushing innovations in software and design to help Motorola devices stand out against Apple’s iPhone, Research In Motion Ltd.’s BlackBerry as well as other Android devices. Motorola’s Atrix, which went on sale in the U.S. in February, plugs into a keyboard-and-screen console similar to a thin laptop so the phone can be used as a personal computer.

Motorola is also working on smartphones with more secure e- mail so companies will be more willing to adopt Android devices, and technologies to make it easier to transfer content from phones to tablet computers to set-top boxes.

“We are taking some risks and betting some dollars and making sure that we have some sustainable differentiation,” Jha said at an investor conference this month.

Jennifer Erickson, a spokeswoman for the company, said executives were not available for interviews and declined to comment on the short interest.

Scale Challenge

The company’s major rivals have greater scale, said Long, which may allow them to demand better terms from suppliers and save on other expenses to lift profits. Motorola pulled back in some international markets as part of its cost-cutting efforts.

Motorola sold 4.1 million smartphones in the first quarter, up from 2.3 million a year earlier. Samsung sold about 12.6 million in the quarter, with HTC at 9.7 million.

“MMI’s lack of global reach is becoming more of an issue,” said Long, the second analyst to downgrade the stock in just more than a week.

Motorola may also have more competition at Verizon Wireless, which is the largest U.S. wireless operator and accounted for 28 percent of Motorola’s revenue last year. Verizon, which began offering the iPhone this year, also sells Android phones from Samsung, LG, Sony Ericsson and HTC.

Verizon Rivals

“Competitive headwinds are intensifying in the U.S. from other Android vendors, notably at key carrier partner Verizon, where we see MMI’s share being vulnerable,” said Kulbinder Garcha, an analyst at Credit Suisse Group AG, who cut his rating on the stock to “underperform” on June 21 and dropped his price target to $19.

Motorola said in April that it will be break even in the second quarter or earn a profit of 12 cents, excluding some items. Analysts forecast a profit of 6 cents a share.

“People are thinking the quarter is probably not good,” said Buzzy Geduld, chief executive officer of New York hedge fund Cougar Trading, who said he has neither a short or long position on the stock. “The stock is cheap but we just don’t know what the catalyst is.”

--With assistance from Nikolaj Gammeltoft in New York. Editors: Peter Elstrom, Cecile Daurat

To contact the reporter on this story: Hugo Miller in Toronto at hugomiller@bloomberg.net

To contact the editor responsible for this story: Peter Elstrom at pelstrom@bloomberg.net


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