A couple weeks ago, we found out that Nokia's (NYSE:NOK) new Lumia phones were out of stock in many countries. At first, this led the investors to believe that these phones are facing very strong demand. Later on, analysts started to question this idea and some skeptically mentioned that Nokia might be simply facing a supply issue. On November 16th, I even said: "this could also be a marketing gimmick played by Nokia and AT&T (NYSE:T). By having a small number of Lumia 920s in each store, the companies might have wanted to create an illusion of selling out, just to increase the demand." It is very difficult to validate this possibility though.
While many stores such as Amazon (NASDAQ:AMZN) and Best Buy (NYSE:BBY) seem to be out of Lumia 920s, and Nokia is having trouble with supplying sample phones to journalists for them to review and write about, the company keeps its silence about the issue. When companies remain silent, speculationsgets going. When Nokia launched Lumia 900, it was initially launched in only a few select countries. On the other hand, Lumia 920 was launched in more than 20 countries simultaneously, and it is possible for many stores to have thin supplies of the phone in the first place.
Danske Bank Markets's Ilkka Rauvola mentioned that his channel checks indicated some component supply issues. However, he raised his estimate of the number of Windows 8 based Nokia devices to be sold from 23 million to 36 million for 2013. Mr. Rauvola also changed his rating on Nokia from Sell to Buy, suggesting a price target around $3.80. Deutsche Bank's Kai Korschelt and Johannes Schaller also agreed that Nokia was experiencing supply issues and they identified the supply issues as the main culprit for the stock issues. Unlike Mr. Rauvola, Mr. Koschelt and Mr. Schaller don't seem to believe that there is a high demand for the new line of Lumia phones. In fact, Deutsche Bank's analysts don't even think the company can sell as many as 30 million Lumia phones in 2013, and their estimated number sits around 23 million. Another industry analyst, Tero Kuittinen, suggested that Nokia probably sent most of its supplies to Europe instead of North America, because the company's products usually see much stronger demand in Europe than North America. In that case, the shortages in countries like Germany, Italy and France must be due to strong demand while the shortages in the US must be due to low supply.
If the issue is based on low supplies alone, this is a big mess from Nokia's management. Having short supplies of this Lumia 920 would be a big mess because Nokia's very existence relies on this phone at the moment. Why would a company put all its eggs in one basket and still not have enough eggs to feed itself? I don't think Nokia's management would make such a big mistake. Yes, Nokia's management isn't the best when it comes to marketing, but the company is pretty good when it comes to building and distributing phones. That is unless there is a serious problem in the supply chain where Nokia doesn't have much control.
Michael Walkley at Canaccord Genuity performed his own channel-checks in the USA, and he found out that while there are some supply issues with the phone, the demand for the phone has also been pretty strong. Mr. Walkley's channel checks indicated that Lumia 920 was the best selling Windows Phone and third best selling phone overall at AT&T stores. This is pretty encouraging for investors of Nokia.
Amazon currently sells Lumia 920s for $69 when one agrees to sign a 2-year contract with AT&T. In the phone's page, the review of the users is overwhelmingly positive. The phone's average score is 4.7 out of 5.0, which is the highest average score I've ever seen in Amazon for a phone. Prior to Lumia 920's arrival, the users assigned an average score of 4.6 for Lumia 900. In comparison, Apple's iPhone 5's average score is 3.7 and Samsung's Galaxy s3's average score is 3.9 at the moment.
Of course, for the time being, one shouldn't expect Nokia to sell its Lumia 920 in numbers similar to Samsung's Galaxy S3 or Apple's iPhone 5. Those phones will sell more copies in a quarter than Lumia 920 will sell in a year, but this is not all bad. Nokia's current market value is $12 billion whereas Apple's market value is $550 billion. Basically, Nokia can sell way fewer copies of its flagship phone than Apple, and this can still be bullish for the company.
While I don't like how Nokia's management has been quiet about the issue, I am not too worried. In the past, Nokia's management has been brutally honest about the issues faced by the company. In fact, there were times when Nokia's management caused too much panic amongst investors by telling too much. One example that comes to my mind is Stephen Elop's "burning platform" reference regarding the Symbian operating system. It looks like Nokia management will remain tight-lipped until the next quarterly earnings call.
I increased the number of Nokia shares I'm holding a couple weeks ago when Nokia's share price fell below $3.00. Initially I bought my first Nokia shares when it was priced at $5.50. For a long time, I didn't buy any new shares but I didn't sell any either. I kept selling covered calls month after month as the share price fell all the way down to $1.70. In my past articles I said that I would hold on to my current shares without buying additional shares or selling any of the existing shares. Of course, I couldn't resist and I ended up buying some shares below $3.00 and some below $2.00. Now my average breakeven price for Nokia shares is $2.60. If Nokia can stop the cash bleeding in 2013, it can easily reach a price around $5-6. I don't agree with those that say Nokia will be $10-15 per share within a year, but I still see a lot of upside in the stock.
Disclosure: I am long NOK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.