BUY OR SELL-Android plays: good bets or more downside likely?

* Android overtakes Windows Mobile as No.4 smartphone OS in Q1

* Lower prices could hit margins for Android plays

(For more Reuters BUY OR SELL stories: [BUYSELL/])

By Baker Li

TAIPEI, July 21 (Reuters) - Shares of major smartphone makers rolling out new models based on Google's (GOOG.O) Android software have stumbled in recent months in a broad selloff in global markets.

Motorola MOT.N, Samsung (005930.KS), ZTE (0763.HK) and Lenovo (0992.HK) are among those set to launch more Android phone models as early as this year, as the free operating system fast becomes the preferred choice of many low-end smartphone makers.

Motorola's shares fell to a nearly two-month low before rebounding, and chipmaker Marvell Technology (MRVL.O), which is also betting heavily on Android, slumped to its lowest in more than seven months in early July.

ZTE shares have lost 26 percent so far this year, while Lenovo shares were down about a quarter since this year's high hit in late April.

BIGGER MARKET SHARE

Global unit sales of Android phones reached 5.21 million in the first quarter, sharply higher than 575,300 units a year ago, wrestling a 9.6 percent share in the smartphone operating system market and moving to the No.4 position, Gartner said.

This helped displace Microsoft's (MSFT.O) Windows Mobile for the first time, the research firm said.

"Ten percent (market share) is achievable this year because we got HTC in Taiwan and more Moto and Samsung phones will fly off the store shelves soon," said Bonnie Chang, an analyst who tracks the handset market at Yuanta Research and expects market share to rise to at least 15 percent next year. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Graphic on Android market share and new Android models,

click: r.reuters.com/cur68m ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

In the past two weeks, many brokers have raised 2010 earnings forecasts or upgraded ratings on Taiwan's HTC Corp (2498.TW), an early adopter of the Andriod software.

"The stock is still cheap. Besides Apple, it looks like Android is gaining popularity in the market," said John Chiu, a fund manager at Taiwan's Fuh Hwa Securities Investment Trust.

The upgrades, along with HTC's stronger-than-expected quarterly earnings and record monthly sales [ID:nTPV001717], sent the company's share price to a nearly two-year high this week.

Around half of 34 brokers tracked by Thomson Reuters I/B/E/S rate Motorola as either a buy or a strong buy.

Most brokers also have a buy rating on Lenovo, and Samsung, the world's top memory chipmaker, which plans to have more than half of its smartphone portfolios with Android this year.

Android and Apple's (AAPL.O) iPhone operating system, which had a 15.4 percent market share in the first quarter, were the only two operating systems among the top five to increase market share on a yearly basis, Gartner said.

PRESSURE ON MARGINS

A key risk for the sector is that a price war looks set to intensify, hurting profit margins if more companies and telecom operators sell more models running on the new software.

Cheaper panels and chips that help save more power and extend battery life would also pull down handset prices.

"Pricing pressure is looming," said Jerry Lee, a fund manager at Yuanta Securities Investment Trust.

"We are not going to buy HTC or other Android plays now and part of the reason is we are also not optimistic about the global economy in the third quarter," said Lee, who declined to name individual shares in his portfolio.

On a technical basis, HTC's 14-day relative strength index (RSI) spiked into overbought territory at 71.435 on Wednesday, implying the risk of a pullback.

New features are also vital for future growth.

JP Morgan said the iPhone 4's two-way video conferencing capability is a big draw for consumers and is a key differentiator from other Android-based smartphones such as Motorola's Droid X. JP Morgan rated Motorola as underweight. (US$1=T$32.15) (Editing by Jonathan Standing and Anshuman Daga)