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As many readers have pointed out, the price of one share cannot decrease by more than 100%. However, to illustrate the dramatic decreases in price, when percentages higher than 100 are used, it is meant to be used as the increase required to return to its original price. Therefore, in this context, a $10 stock decreasing to $2 would mean a 500% decrease because it would have to increase 500% to return to its original price.

Never mind that the share price for Nokia's (NYSE:NOK) is down from its heyday by more 1800% since the year 2000, or 1200% since 2007, the current management team headed by CEO Stephen Elop is not responsible for that.

"Officially", his team is responsible for a drop of 300% in the share price ... only. Actually, it's much worse than that. Using the following analysis, you will understand how the current leadership team at Nokia is a portfolio crusher of more than 800%. And apparently, more and more shareholders are catching on to this hush-hush reality, as Reuters reported from the company's annual general meeting earlier this week.

When I began this analysis on April 23, one share of Nokia was worth US $3.21. Saying that investors who bought into Nokia several months or years ago are not pleased is a very large understatement. Before they bought in, thousands of those investors, as did I, looked at the history of Nokia as a producer of well-designed and durable cell and smartphones and believed that the share price would bounce back in the space of one to two years after signing a partnership with Microsoft (NASDAQ:MSFT) to use the Windows Phone operating system in February, 2011.

More than two years later, Nokia is still producing well-designed and durable cell and smartphones but the market has decided that the shares of Nokia are still not worth very much. It does not take a lot of effort to compile the reasons why this is so. Using only sales from smartphones, I will show in table A why the market has priced Nokia so low. In table B, I will demonstrate how Nokia's share price could be up by more than 500% if it had limited its major mistakes in execution, 10 of which I will list. To conclude, I will provide an outlook of what investors can expect going forward for the rest of 2013.

Table A - Nokia Lumia Sales: Poor execution

DATE

LUMIA

UNITS

LUMIA

SALES

SYMBIAN

SALES

ASP

TOTAL

SALES

SHARE

PRICE

LUMIA MODELS

AVAILABLE

2011-Q4

0.5*

91

3496

183

3588

5.43

800

2012-Q1

2

374

1852

187

2225

3.81

800, 710

2012-Q2

4

789

1224

197

2013

2.01

800, 710, 900, 610

2012-Q3

2.9

587

688

202

1275

2.90

800, 710, 900, 610

2012-Q4

4.4

1069

531

243

1600

4.31

800, 710, 900, 610, 510, 820, 920

2013-Q1

5.6

1397

123

250

1520

3.16

800, 710, 900, 610, 510, 820, 920, 620, 920T

2013-Q2

7.3

1878

33

257

1911

3.42

800, 710, 900, 610, 510, 820,

920, 620, 920T, 720, 520

Notes: * = Estimate only. Currency is in today's US dollars converted from euros. Units and sales are in millions. Sales and ASP numbers are rounded off at the first decimal, and share price at the second decimal.

Poor Execution

  • Looking above to table A, sales of the first generation of the Nokia Lumia smartphone started at the half-point of 2011-Q4 on November 11, 2011. In just six weeks Nokia sold an estimated 500 000 units of the Nokia Lumia 800.
  • Moving on to 2012-Q1, Nokia reports sales of two million Lumia units. Considering only the 800 was available for sale until several weeks into the quarter before the 710 was available, an increase of 400% in sales, to 2 million, is an impressive jump. However total smartphone sales are reduced by $1.3 billion because Symbian powered smartphones are down 50%. Carriers and consumers clearly see Symbian as dead because Elop announced that Nokia would "adopt Windows Phones as its primary smartphone strategy." The CEO could have avoided this major mistake by saying that it would "add" Windows Phones to its portfolio of smartphones. The market sees confirmation of this premature death as Lumia and Symbian numbers are headed in opposite directions. As a result, investors are hit with a 30% reduction in share price from $5.43 to $3.81.
  • Three months later, in 2012-Q2, again good and bad news is felt. With two additional models added, the 900 and the 610, Lumia sales double from 2 to 4 million units. But Symbian sales plummet again by 33% to $1224 million. The average selling price (ASP) is increasing due to recognition by carriers and consumers that Lumia is a quality product. Despite this, share price strangely tumbles 46% to $2.01 and then keeps on falling to its lowest point in Nokia history later on in the quarter. Murmurs of bankruptcy can be read on the Internet. Shareholders, including myself, feel helpless.
  • In 2012-Q3, information from an article published earlier by The Verge on June 20 is becoming more widely available stating that Windows Phone 7 users have purchased a stillborn. Consumers who took a chance with first-generation Lumias are rewarded by receiving no upgrade to Windows Phone 8. The information was actually first published in April by the same website, but lacking confirmation from Microsoft, the story didn't have any legs. No new Lumia models are launched in the quarter. Numbers of Lumia units shipped drop almost 30%. Revenue from Symbian smartphone sales plummet - further still - 44%. ASP nevertheless continues its upward trend. Participants in the market are willing to take a risk on Nokia at $1.63, and share price rises during the quarter to end at $2.90 on earnings day.
  • In 2012-Q4 brave shareholders see the price of their shares increase during the quarter more than $1.30 to end at $4.31 on earnings day. The fourth quarter, typically the strongest quarter for smartphones sales, sees three new Lumia models, WP7's last, the 510, and WP8's first shiny new 920 and 820. Lumia units shipped are up 51% to 4.4 million. The value of Lumia sales almost double. ASP sharply increases by $40. However, revenue from Symbian smartphones is down 23%.
  • 2013-Q1 sees two new Lumia models introduced, the 620 and 920T in China. Stories of sellouts that turn into stories of component shortages are popping up more and more often on the Internet. The quarter brings a 21% increase in Lumia units shipped from 4.4 million to 5.6 million and ASP is up by more than $6 to $250. Symbian smartphone sales, however, decrease 77%. The price of one share decreases 26% in the quarter to end at $3.16 on earnings day.

Next Quarter Estimates

  • In 2013-Q2, I estimate that units of Lumias shipped will increase 30% to 7.3 million, based on Elop's own words during the 2013-Q1 earnings teleconference and the introduction of two additional Lumia models added to the portfolio, the 720 and the 520. I also estimate Symbian smartphone sales to continue its trend tanking another 74% to $33 million in sales, and ASP to increase. Based on the average of all categories in the table going back six quarters and their impact on the share price, I estimate the price of one NOK share to be worth $3.42 at the end of earnings day, an increase of almost 8%.

10 Major Mistakes

Sales numbers of the last seven quarters, including the present quarter, were impacted by many factors, some of which I enumerate below in the list called 10 Major Mistakes. Keep in mind that many, if not all, of the major mistakes have a domino effect on sales.

  1. Bad planning in public relations in announcing the adoption of Windows Phones as its "primary" smartphone OS instead of saying it was "adding" it to its portfolio.
  2. Bad planning in reducing manufacturing capacity thereby reducing output of smartphones
  3. Bad planning in reducing employee capacity thereby reducing output of smartphones.
  4. Bad planning in component selection and inventory purchase thereby reducing output of smartphones.
  5. Bad planning in reducing marketing, thereby reducing sales of smartphones.
  6. Bad planning in public relations in announcing that WP7 would not upgrade to WP8, instead of announcing everyone would get WP8, and then later saying some apps would need to meet certain system requirements, reducing sales and ASP of WP7 smartphones.
  7. Bad planning in public relations in faking video of Lumia 920 in television commercial.
  8. Bad planning in using 6-month carrier exclusives, reducing sales of smartphones.
  9. Bad planning in wrongly estimating Android smartphone price reductions in emerging markets, reducing sales of Asha smartphones.
  10. Bad planning in having tardy Asha smartphone line refresh in emerging markets, reducing sales of Asha smartphones.

Good execution

In table B below, I will estimate what sales of Lumia units should have been at each quarter if the number of major mistakes had been reduced. At the end you will see that the share price should be up by more than 500%.

Before concluding that this may be an exaggeration, consider that the numbers in table B only include potential increases in shipments of Lumia units and not the extreme decreases in sales of Symbian powered smartphones. In other words, a better public relations strategy in the announcement of the Windows Phone adoption would have prolonged the life of Symbian, and perhaps even increased sales to new heights, as they would have benefited from the halo effect on Nokia's strengthened brand. This one decision would have added many, many billions of U.S. dollars in sales to Nokia's bottom line, making a share price of $28.90 grossly underestimated.

Table B - Nokia Lumia Sales: Good execution

DATE

LUMIA

UNITS

LUMIA

SALES

SYMBIAN

SALES

ASP

TOTAL

SALES

SHARE

PRICE

LUMIA MODELS

AVAILABLE

2011-Q4

0.5

122

3496

243

3618

6.40

800

2012-Q1

2

502

1852

251

2353

4.17

800, 710

2012-Q2

4

1066

1224

266

2288

4.05

800, 710, 900, 610

2012-Q3

8

2382

688

298

3069

5.43

800, 710, 900, 610

2012-Q4

16

5767

531

360

6298

11.15

800, 710, 900, 610, 510, 820, 920

2013-Q1

24

9403

123

392

9527

16.86

800, 710, 900, 610, 510,

820, 920, 620, 920T

2013-Q2

40

16299

33

407

16332

28.90

800, 710, 900, 610, 510, 820, 920, 620, 920T, 720, 520

Notes: all numbers from 2012-Q3 and later are estimated except Symbian sales. Currency is in today's U.S. dollars converted from euros. Units and sales are in millions. Sales and ASP numbers are rounded off at the first decimal, and share price at the second decimal.

  • Referring to table B above, in 2011-Q4, an estimated 500 000 Lumia units were shipped. I give Nokia the benefit of the doubt, but as Q4 is typically the best quarter for smartphone sales, imagine if the 800 had been available earlier in the quarter, in greater numbers throughout the world and supported with increased marketing. In consideration of this and the fact that the 800 is a brand new premium phone being purchased by early adopters, ASP should have been higher, slightly increasing total sales and, more importantly for shareholders, a better price at $6.40 instead of $5.43.
  • To put more weight on this supposition of higher sales in 2011-Q4, if sales are up 400% in 2012-Q1, typically a slower quarter, it means that there was pent up demand that was not filled earlier. I leave that number untouched as well, but ASP would have increased modestly from Q4. Share price on the end of earnings day would have been $4.17 instead of $3.81.
  • In 2012-Q2 Lumia shipments are doubled. It's easier to have increased percentages in sales when you are starting from smaller numbers. I leave that quarterly number unchanged but, since ASP did increase in reality, I modestly increase it as well from $251 to $266, in consideration of increased sales and enhanced Lumia reputation. As a result, the share price does not decrease from $3.81 to $2.01 as it did, but goes from $4.17 to $4.05. I contend that if the trend of Lumia sales would have gone in this direction, there would not have been as many murmurs of bankruptcy.
  • In 2012-Q3, the fourth full quarter of Lumia ramping up, the benefit of the doubt can no longer be given. I vividly recall reading about considerable negative publicity about Nokia and Lumia on the Internet surrounding the upgrade from Windows Phone 7 to 8. Consumers and shareholders, including myself in both categories, were clearly upset and this feeling overflowed into traditional media. With better management of the upgrade question and an earlier release of the Lumia 510, instead of the delaying it to Q4, total Lumia shipments should have continued their upward trend from 4 million to 8 million units, instead of decreasing to 2.9 million. Despite the reduction in sales, ASP still increased. I estimate a moderately larger increase from $266 to $298 increasing the price of one share from $4.05 to $5.43.
  • In 2012-Q4, the strongest quarter, Lumia unit shipments increased 51% with the inclusion of the 820 and 920. With better management of employee and manufacturing capacities, better planning around component selection in the design stage, no carrier exclusives, as well as more, better and truthful marketing, Q4 should have had blowout numbers in terms of Lumia smartphone shipments. Again, the number should double the previous quarter to total 16 million units. If you think that's an exaggeration, remove the domino effect of all previous bad decisions to date and consider the halo effect of all the additional, free promotion by the 15 million estimated Lumia users to date, as well as bloggers and traditional media. At 16 million units for Q4 alone, it's still only a piddly one third of the 44.8 million iPhones sold in the same period. Shareholders would however welcome this fraction, as, with the increase in ASP from $298 to $360, share price more than doubles in the quarter from $5.43 to end at $11.15 on earnings day.
  • In 2013-Q1, the trend continues upwards with the ever increasing strength of the popularity of the Lumia line, additional releases in the 620 and 920T, as well as free and paid promotions. Units shipped do not double again, but increase at a healthy 50% to total 24 million units shipped, compared to Apple's 37 million iPhone units in the same period. The halo effect of the increasing world-wide popularity of Lumias likely has a positive impact on the Nokia brand. As a result, sales of mobile phones do not decrease. With more financial resources, perhaps Nokia has more eyes and ears in India and China to ensure that an Asha refresh is carried out in advance of its competitors' actions instead of as a reaction. We have seen Nokia make costly mistakes in the past when it was King. The lesson here is that more money does not necessarily ensure better competency and execution. However, in today' ultra-competitive mobile and smartphone environment, without the latter, you will not get the former. Based on the increase in Lumia shipments, and the modest increase in ASP in 2013-Q1, the price of one share increases in the quarter from $11.15 to $16.86.
  • Finally, in 2013-Q2, the previous positive elements continue to snowball, two new Lumias are released, the 720 and the 520, ASP increases modestly, and total units shipped increase 66% to 40 million. The price of one share goes from $16.86 to end the quarter at $28.90 on earnings day.

At the end of 2013-Q2, continued bad execution will give shareholders $3.42 a share. Compare that with the last seven quarters used in the analysis, good, not perfect, good execution would have provided a share price of $28.90, a difference of 845%. Most, if not all, shareholders would settle for a tiny 20% of that amount, at $5.78.

Going Forward

The immediate future does not look bright for Nokia, dim at most, in regards to its share price. Rumors posted on blogs indicate that the latest hero Lumia device, the 928, will be released in the coming weeks exclusively at one U.S. carrier. If this is the case it demonstrates that Nokia has not learned that choosing an exclusive carrier limits the amount of customers that can have access to its products, not what a struggling smartphone maker should want.

Only a few days ago, more information started circulating on the internet of the latest low-end Lumia, the 521. Stories indicated it was sold out during its first weekend on the Home Shopping Network, then in 60 minutes at Wal-Mart (NYSE:WMT). For Samsung (OTC:SSNLF) or Apple (NASDAQ:AAPL), this would mean millions of units sold. For Nokia however, based on execution in the last seven quarters, this likely means thousands of units sold at most, and future delivery dates unknown or months away meaning frustrated customers and lost sales.

Until Nokia improves execution on component selection and purchase, as well as manufacture and delivery of units - in sufficient amounts and on time - it will continue to limp along. Until it improves in those departments, it will keep falling further and further behind Samsung, Apple and other up and coming OEMs from Asia and India. Even if Windows Phone market share is improving, its numbers are tiny in the US and the onslaught of products by competitors is not slowing down. Don't expect a significant improvement in share price until it reports numbers for 2013-Q4. Perhaps by then, it can show some improvement in execution.

Conclusion

Nokia makes compelling, quality products, but major mistakes have had catastrophic impacts on sales and share price since Stephen Elop became its leader. When the price of one share reaches its lowest point in a long-standing history, it should serve as a wakeup call that what you are doing is not working.

Big business is not kindergarten or even a university environment, where you are allowed and encouraged to make mistakes so you can learn and grow. In a large corporation, when major mistakes are made, individuals and families can get seriously hurt. Livelihoods are lost, pension values are reduced. A corporation such as Nokia needs individuals with talents in many fields, but the most important person, the leader, is one that has a proven track record of making money.

Source: Elop's Nokia, A Portfolio Crusher?