3 Stocks to Watch in Phablets

iPhone 6 (left) and the larger iPhone 6 Plus (right). Photo: Apple.

The demand for phablets has exploded over the last four years. What was once a tiny niche offering has become a dominant and enduring strand of the smartphone market. In the U.S., phablets -- handsets with screens larger than a traditional smartphone, but smaller than a tablet -- accounted for roughly one-fifth of the smartphones sold in the first quarter, up from about 6% in the first quarter of 2014.

For investors, there are many phablet-related stocks to keep an eye on. Samsung , Apple , and Google are the three most significant.

Samsung didn't invent the phablet, but it popularized the concept

Samsung wasn't the first smartphone manufacturer to offer a phablet. That honor goes to Dell, with its 2010 Streak. But the Streak was a failure -- it sold poorly and was rapidly discontinued. By contrast, Samsung's Galaxy Note line, which debuted one year later, was a stunning success, establishing the market for phablets and setting the standard.

Samsung has continued to refine and expand its phablet lineup. It remains a dominant force in the market, but it's clearly under pressure. In Asia, where phablets account for more than 40% of smartphone sales in some countries, Samsung competes with a wide variety of handset manufactures offering phablets much less expensive than its own. China's Xiaomi, for example, sells the Redmi Note 4G, a 5.5-inch smartphone with a powerful processor and a high-end camera. In India, it retails for about $160 -- Samsung's competing Galaxy Note 4 is more than four times as expensive.

The price disparity seems to be having an effect. Samsung was once the top seller of smartphones in China, but it has been overtaken by Xiaomi and other homegrown Chinese vendors. At the upper end of the market, Samsung now competes with Apple, which finally rolled out its first phablet late last year.

Samsung remains a trendsetter -- it was the first smartphone manufacturer to roll out a phablet with a curved-edge display -- but it may need additional innovation to keep its phablets relevant. Samsung doesn't break its phablet sales out from the rest of its smartphones, but given that they tend to be its most expensive handsets, they're likely significant contributors to its mobile profitability. And Samsung's mobile profit has sagged in recent quarters as competition has caught up.

Apple's late entrance appears to have been a stunning success

Apple took quite a while to enter the phablet market, but its entrance has been spectacular. According to Kantar Worldpanel , Apple's iPhone 6 Plus accounted for nearly half the phablets sold in the U.S. during the first quarter of 2015, up from literally nothing in the same period last year.

Apple is more forthcoming with its iPhone sales figures than Samsung, but like Samsung, it doesn't break its phablets out from the rest of the iPhones it sells. Still, the iPhone 6 Plus fills an important strategic niche for the company, allowing it to court customers who otherwise would've gone with an Android smartphone.

Apple's management has said that it's seeing a greater proportion of Android switchers than in previous iPhone cycles . The existence of the iPhone 6 Plus may be a key reason. Also, both the iPhone's average selling price and Apple's gross margin have risen in the last two quarters -- the more expensive iPhone 6 Plus may be (at least partially) the reason for this, too.

How Google could benefit from phablets

Handsets are not a major part of Google's business. Its phablet, the Nexus 6, is actually manufactured by Motorola. But Google's fate could be at least partially tied to the continued success of the phablet market.

Google bears have argued for years that the transition to mobile computing would devastate its advertising business. Desktop ads are more easily monetized than mobile ads, as consumers are less likely to make purchases on mobile devices. The amount of money Google makes on an average ad has been declining since 2011.

But in a recent interview with The Wall Street Journal , Google's advertising chief Sridhar Ramaswamy argued that the growing popularity of phablets minimizes this issue. Phablets, with their larger screens, offer an experience closer to a tablet or even a traditional desktop computer, making it easier for consumers to complete purchases.

It's certainly an indirect mechanism, but if phablets continue to grow in popularity, it should benefit Google's core advertising business -- and its stock.

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The article 3 Stocks to Watch in Phablets originally appeared on

Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends Apple, Google (A shares), and Google (C shares). The Motley Fool owns shares of Apple, Google (A shares), and Google (C shares). Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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