Putting the World in Your Pocket With a Cell Phone

Michael Brush
February 23, 2006

In the beginning, cell phones were just phones. And that was good enough. Now they take pictures and shoot short video clips. Or they let you play games and surf the net to download cool ring tones.

Down the road, your phone will basically be a full-fledged multimedia center – sort of like a TV, DVD player and iPod wrapped up into one. It’s all part of the evolution of mobile phone operators as they morph from being simple phone service providers to outright media companies.

There’s good reason for this change. With competition knocking the profit margins out of basic phone service, these companies know they have to move into higher-margin media content to thrive. Besides, people will always want cooler toys.

Behind the scenes, however, these new features are putting fresh demands on the guts of the cell phone. In particular, memory and processors will have to become a lot more robust and flexible.

Where will all the computing power and storage come from? Right now, industry observers are watching as phone providers re-work combinations of different kinds of memory to get the job done. One format, called NOR, is good at storing application code. Another, called NAND, is a lot slower, but it is cheaper and good at storing data – like songs inside portable music players.

A third way

A chip company recently spun off from Advanced Micro Devices (AMD), meanwhile, has been working hard using a proprietary technology to find a third way. Known as Spansion (SPSN), the company is applying a technology called MirrorBit, to create a hybrid of NOR and NAND. The hybrid is called MirrorBit ORNAND.

Spansion believes MirrorBit ORNAND is faster and more reliable than current forms of memory used in cell phones. So it should be better at supporting multimedia features. The technology is also “scalable,” which means handset designers can scale the flash memory they order depending on how complex they want their phones to be.

Industry analysts and investors are not so sure about all this. In a recent note on Spansion, Deutsche Bank Securities Ben Lynch wonders whether MirrorBit ORNAND will be a success. He notes that the new approach is only now being tested by customers with no real public feedback to date. Many investors seem to share the uncertainty. Spansion was spun out in December, but to get the deal done banks had to lower the offer price, says Lynch.

Buoyant insiders

Insiders, in contrast, are fully confident. “We had to invest a ton of money without having instant gratification,” chief executive Bertrand Cambou told me in a recent interview. In short, he says, the company has been in research and development mode, with little revenue to show for it. But all that is about to change, he believes. “Now we are at a position where we are ready to blossom and explode as a powerhouse in this space,” says Cambou.

The cynic’s view, of course, is that chief executives are always bullish on their business. But Cambou is a bull who puts his money where his mouth is, and that’s exactly what we look for here at Insiders Corner.

Shortly after his company came public, he purchased $653,000 worth of the stock at around $13. A director also made a big purchase at about $15.60 recently, rounding out the total insider buying so far to $1 million. That’s a good signal.

Of course, not every cell phone user is going to want to put a media center in his pocket. But many will. How many? A cell phone market strategy consultant called iGillottResearch estimates that in four years, one in six handsets will have processors, memory and operating systems with computing capabilities similar to those found in laptops.

But even lesser phones can use Spansion’s technology – and growth in the sector should remain robust, predicts iGillottResearch. The firm estimates that 1.2 billion handsets will be sold in 2010, compared to 808 million last year. Spansion memory will also be used in automobiles, smart cards, and other devices beyond cell phones.

The bottom line: The best time to own a tech company is right in front of a new product cycle – especially one linked to a hot market – before everyone else catches on. That’s what you have with Spansion and its memory product for cell phones turning into media centers. Of course, you never know if a new technology will really be a hit. But when insiders step up and place big bets with their own money, it’s a powerful sign. I’d buy right hear near $15 per share. But with so much volatility in the chip sector of late, and the natural volatility of recent offerings, you might be able to get the stock lower, too.

Disclaimer

At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.

For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.