On Monday, Nokia (NOK) investors saw their investment being downgraded by Goldman Sachs (GS) once again. The investment bank raised its skepticism regarding Nokia's ability to gain market share from Apple (AAPL) and Samsung (SSNLF.PK) in the near or medium term. The bank argued that Nokia still didn't have a flagship phone that could rival Apple's iPhone or Samsung's Galaxy series and that Windows Phone wasn't gaining enough attention from the consumers. As a result, Goldman Sachs believes that each of Nokia's shares is worth $3.50. The company expects Nokia to sell 29 million Lumias this year followed by 49 million next year and 62 million in the year after. Furthermore, the investment bank expects Nokia to have single-digit margins for all three years.
Before I even get to the topic, let me mention something related to this. These days the analysts see Samsung as an excuse to downgrade pretty much anything they want to downgrade. For example, when they want to downgrade Apple, they say it's because "Samsung is stealing market share from Apple." When they downgrade Nokia, again, they say that Nokia is "having trouble stealing market share from Samsung." Even when companies like Sony (SNE) are downgraded, Samsung is always mentioned. One would look at these analysts and be very tempted to ask the question: "is Samsung the only company that ever sells anything in electronics?" The analysts make it seem as if Samsung is on its path to world domination and every other electronics company in the world is getting crashed by this company because it sounds trendy. This way, analysts can push a company American investors can't really buy and make a "safe bet" where there aren't many consequences if they are wrong. Don't get me wrong, Samsung is one of the most successful companies in the world today, but that doesn't mean every electronics company in the world with the exception of Samsung is failing.
The analyst who downgraded Nokia is Rick Schafer, and yes, I am talking about the same guy who said that Nokia shares were worth $1.60 last August when they were trading for $2.27. Back then, Mr. Schafer said that the competition was so tough that no one would really notice Nokia's Lumia 920 and that the company would continue to see worsening margins, and we all know that he was dead wrong. So I would take his conclusions with a grain of salt.
Now we are going back to Nokia. I don't agree that Nokia doesn't have a flagship phone that can rival Apple's iPhone and Samsung's Galaxy series. Nokia's Lumia 920 is very comparable to iPhone 5 and Galaxy S3 both in hardware specifications and other qualifications. On many websites where people rate phones, such as Amazon.com (AMZN), people rated Lumia 920 to be as good as the competition's flagship phones if not better. On Amazon, the phone was rated by 212 consumers with an average rating of 4.6 out of 5.0 whereas different versions of iPhone 5 were rated between 3.6 and 4.4 in the same website. As for Samsung's Galaxy S3, its average rating was 4.0. In Amazon.de (the company's German store) Lumia 920 and Galaxy S3 both receive average ratings of 4.5 whereas Apple's iPhone was rated 4.0 on average. Obviously, consumers don't agree with Goldman Sach's statement that Lumia 920 is not comparable to competitor's flagship phones.
Furthermore, the competition from Apple and Samsung is not a basis for a downgrade because this competition didn't just start yesterday. Apple and Samsung have been pressuring Nokia's revenue growth for several years by now and that's nothing new. In fact, Apple's share price started to suffer significantly after Nokia released its new line of Lumias. I am not saying that Apple's share price suffered because of Lumia 920, but I am sure there is some correlation there. Re-emergence of companies like Nokia, Sony and BlackBerry (BBRY) will put some pressure on companies like Apple and Samsung rather than other way around because Samsung and Apple's pressure on these companies has already peaked in the last couple years. Many of Apple's investors are selling their stocks because they believe that the tide is changing.
In 2012, Nokia sold 13.4 million Lumia devices. In his bearish analysis, Mr. Schafer expects the company to sell 29 million Lumias in 2013, which represents a year-to-year growth of 116%. In 2014, he expects Nokia to sell 49 million Lumias, which represents a year-to-year growth of 68%. In 2015, he expects Nokia to sell 62 million Lumias, which represents a year-to-year growth of 27%. So, even if we take his bearish scenario, Nokia is still expected to see a lot of growth in the next 3 years. Also, keep in mind that Nokia is not all about mobile devices and the company has other segments such as Here (Nokia's mapping business) and Nokia Siemens Networks.
Last time Goldman Sachs downgraded Nokia, the investment bank bought a bunch of Nokia shares in the dip. I wouldn't be surprised if the bank does it again. As long as Nokia's market value stays around the same level as its cash reserves, it is a pretty safe investment. At current levels, Nokia is pretty much priced for bankruptcy. This is why I will continue to be long in Nokia and add to my shares every time the price falls below my breakeven price.