In the last month, Nokia (NOK) had been on a rally, which came to a halt last week. The company's share price moved from $2.62 to $3.88 within a matter of weeks, and it started to fall after that. Currently the company's share price is $3.68, which might fall a little further before it goes back up. Interestingly enough, it looks like analysts are lining up to attack Nokia once again. Are analysts right this time, or are they simply upset about getting Nokia wrong for the last year?
The analysts of Oppenheimer are very skeptical about Nokia's recent recovery. While Oppenheimer's analysts believe that Nokia will beat the estimates this quarter, they believe that the company will not do that well in the long term. The analysts believe that the company's new phones are seeing "decent demand" and the supplies are catching up to meet the demand. In addition, the analysts also see the low end Asha phones stealing market share from Android phones and they add that Nokia Siemens Network has upside. Even with all the encouraging analysis, the analysts at Oppenheimer still can't help but be bearish towards Nokia. They believe that Nokia's momentum might not be sustainable and that the new Nokia phones are seeing high demand mostly because of their cheap pricing.
I personally don't agree with the analysts. In fact, the analysts at Oppenheimer can't seem to make their mind about Nokia. Back in February, they downgraded the company, followed by upgrading it in June. Now they are downgrading it again. I bet they will upgrade it once again when they realize that the company's momentum is here to stay for a while, rather than being a temporary thing. Oppenheimer's analysts seem to think that Nokia's momentum is partly due to a huge push by Microsoft to market the Windows 8 products. Even if this is true, I don't see Microsoft just dropping the push out of blue. Microsoft will continue to push these products for as long as necessary, because the company's future rests with these products. For some reason, the analysts at Oppenheimer believe that Microsoft will stop pushing Nokia's phones after the first quarter of 2013. I don't see a reason for that though.
Furthermore, Bank of America's analysts also seem to believe that Nokia carries too much risk for it to be a good investment. Bank of America's analysts believe that too much hope is baked in Nokia's share price at the moment. The analysts state that the company may or may not show improvement in the next couple quarters, but most of the improvements are already priced in by investors. This is something I have a lot of trouble accepting. Nokia's share price fell from $10 all the way to $1.69 in the last 2 years. The fall was mostly due to fears that Nokia would burn through its cash reserves and go out of business within a matter of quarters. Obviously this didn't happen and the cash bleed came to a significant slowdown. In fact, two out of Nokia's 3 business units had positive margins in the last quarter. Now that the company's imminent bankruptcy isn't an issue anymore, why should the shares trade for near the book values? In the technology sector, companies typically trade near their book values only if there are serious fears that they will go out of business and face liquidation soon. Investors don't feel that Nokia is in this position anymore, even though they thought it was in that position as recently as last summer. How can Bank of America's analysts think that Nokia's share price has too much hope baked into it when the company lost 90% of its share value since 2008? I would say too much fear is baked in Nokia's share price rather than saying too much hope is baked in the price.
Keep in mind that the same analysts of Bank of America also called Nokia's new deal with China Mobile as "unimpressive." The analysts pointed out that Nokia used to have a similar deal for its Symbian phones which didn't help it in China. Therefore, this deal should also generate similar results. This is weak argument at best. That's like saying "Ford didn't sell a lot of cars in 2005 so it won't be able to sell a lot of cars in 2012 either." In the technology sector, things move too fast and it is incredibly difficult to see what kind of reaction a new product will elicit based on the past products of the same company. The fact of the matter is Nokia's Windows 8 phones are gaining market share as its Symbian phones are losing market share. These two phones can't be comparable. At the end of the day, Symbian phones and Windows 8 phones are completely different products.
On average, analysts expect Nokia to report a loss of 5 cents per share this quarter. The estimates range from a loss of 13 cents per share and a profit of 3 cents per share. I personally believe that Nokia will come pretty close to breaking even in this quarter excluding the one-time items such as asset sales and restructuring charges. Because Nokia has been quiet about how the phone sales are going, it is very difficult to pinpoint the number of Windows 8 devices that will have been sold by the end of the quarter. The predictions typically range from 4 million items to 10 million items which is a very wide range. We will have to wait and see, but keep in mind that Nokia beat analyst estimates in the last 2 quarters.
I still think Nokia is a good investment but there might not be a lot of upside in the short term. The company's share price will probably trade within a range between $2.60 and $3.80 for a while. Every time the share price goes below $3.00, it is a good idea to buy some shares and whenever the price goes above $3.50, it is a good idea to at least sell some covered calls on the shares. Once the uncertainty is removed from the company's future, the range will get broken and the company's share price can see higher prices such as $5-6 per share.
Disclosure: I am long NOK.