On May 14, Nokia (NOK) announced its new flagship phone Lumia 925 shortly after announcing Lumia 928 which led to a sell-off. Apparently, the investors aren't too excited about the company's new phone. The phone looks like a slight improvement over Lumia 920 and Lumia 928 and many investors were expecting much more than that. Furthermore, there was also some classic "sell on the news" incident going on.
A Word on Investors and the Smartphone Market
Before I even get to Nokia, I'd like to talk about a trend I've noticed lately. It looks like whenever a smartphone company announces a new phone, its market share plunges. When Apple (AAPL) announced iPhone 5, the market didn't take it kindly. When Nokia announced Lumia 920, the market started a sell-off. Even Samsung wasn't spared when it announced its newest flagship phone Galaxy S4. The company's share price plunged by 8% immediately after the announcement. What is going on here?
It looks like the investors have unrealistic expectations from smartphone companies. Do you remember when Steve Jobs announced the first iPhone? The people in attendance couldn't help but admire the product. Steve Jobs was announcing a revolutionary product that wasn't seen or heard of before. The product changed the entire industry, along with many other related industries (such as the PC industry). Now, whenever an established smartphone company gets ready to announce a new product, the market expects the company to create the same effect. The market expects phone companies to "wow" us every time they launch a new product. They want phone companies to revolutionize the industry every year with every product they launch. Sorry, but that will not happen. Revolutionary products don't come every day. They come rarely; that's why they are revolutionary.
Most smartphones you will see in the next few years (regardless of company) will carry nothing but slight improvements over the existing products. This is just like the car industry. You don't see Ford's (F) share price plunge when it "fails" to launch a flying-car or a self-driving car. The investors don't expect revolutionary products from car companies because car companies are well-established. Now smartphone companies are also entering into that stage.
An Example: Apple
Do consumers care? They certainly don't care as much as investors do. Investors look at phone companies as if they will go bankrupt if they don't announce a new "revolutionary" product ever year; whereas, the consumers look at it differently. Recent studies show that a large majority of iPhone's existing consumers plan on buying another iPhone when it's time to replace their phone even if iPhone's innovation slows down.
Here is a quote from Robin Headlee, VP at Millward Brown Optimor:
"Of course, innovation has also been an important driver of brand loyalty, particularly in the last few years where Apple stepped up its new product launches and competitors like Samsung have also started innovating. While innovation remains incredibly important, fans of Apple don't expect to see frequent large scale innovations.
While Nokia may not have as many "fanboys" as Apple, this applies to companies like Nokia too. Ford doesn't have to reinvent cars every year, just like Nokia doesn't have to reinvent the phone.
Here Comes Lumia 925
Now we can return back to Nokia. I talked about the smartphone industry as a whole and offered Apple as an example, because investors are looking at every smartphone company the same way. Whenever a company announces a new product, expect the "disappointed" investors to initiate a sell-off regardless of the company and the product. Nokia's new Lumia phone seems like an improvement over the same company's earlier flagship phone Lumia 920. It sounds like Nokia has paid attention to the consumers in making the changes on this phone. For example, a lot of people were complaining about how Lumia 920 was so thick and heavy, and as a result, Lumia 925 is much lighter and thinner. Consumers pay attention to things like that whereas investors don't. With Lumia 925, Nokia took its flagship phone and fixed it up considerably based on consumer feedback.
I won't talk about the technical specifications of this phone because most flagship high-end smartphones have very similar specifications these days. What sets phones apart from the competition tends to be the other details such as design, quality and user friendliness of a phone. Nokia is switching from polycarbonate to aluminum with Lumia 925. The phone will be tougher but lighter than Nokia's other high-end phones. Furthermore, the phone looks more "futuristic" and it is likely to attract younger people that are looking for something unique and different.
Ifi Magid, director of Nokia's Smart Devices talked about how Nokia will market the phone around its imaging capabilities and some "smart camera" capabilities. This is not much different than what Nokia did with Lumia 920. It seems like the company thinks that the only way it can differentiate itself from the competition is by focusing on photography aspects of its flagship phones. This may work, as a lot of people use their smartphones to take photos for a variety of applications they have, such as Facebook (FB). A recent Nielsen study found out that an average member takes 30 photos and 8 videos a month using his or her smartphone. Furthermore, an average user spends 19% of his or her smartphone usage time on multimedia activities including but not limited to taking, editing and viewing photos and videos. While photography capabilities of a smartphone are important for users, it's not the only thing a smartphone comes with. Maybe Nokia should focus on marketing the phone around other capabilities too.
Unfortunately, in the US, the phone will be sold by T-Mobile only. AT&T has Lumia 920, Verizon has Lumia 928 and T-Mobile has Lumia 925. I don't really like this strategy. All three carriers should carry all three phones and consumers should get to pick which phone they want from which carrier. The phone will not be able to sell many copies in the US because it is limited to T-Mobile, the smallest nationwide carrier in the country. It's hard enough to get Americans to change their mobile phone, but it is even harder to get them to change their phone carrier. Even though the trend is on the decline, on average subscribers of Verizon (VZ) or AT&T (T) stay with the company for 51 months which is a little over 4 years. Even when they decide to switch their carrier, subscribers of companies like Verizon and AT&T are not very likely to switch to T-Mobile, as they will usually switch from Verizon to AT&T or vice versa. Currently, Verizon and AT&T account for 65% of the market share in the US, whereas T-Mobile's market share is as low as 9%, which is down from 12% last year. It is sad that the best Nokia phone ever made will be available to 9% of US population where it may not gain a significant market share. Outside of the US, the phone is likely to sell more copies.
Update on Lumia 521
A couple of weeks ago, I published an article about how Wal-Mart (WMT) would start carrying Lumia 521, which is one of the most affordable smartphones in the market. The phone was sold out on the first day. After that, Wal-Mart apparently ordered new copies as some stores reported having some copies. As of today, most of the stores are out of stock again. I don't know if there is a supply issue or too much demand; however, the phone keeps selling out in Wal-Mart. Last Friday, I randomly checked inventories of 25 different stores across the US (online) and 17 had the phone; whereas, today only 3 of these stores report having the phone in their inventory. Furthermore, the last time I talked about Lumia 521, there were no reviews of the phone on Wal-Mart's website. Today there are 18 reviews and all the reviews are positive. The phone has 5 stars on average, which means all the reviewers gave it 5 stars.
Short Interest Drops Further
Last week, I also talked about how the short interest in Nokia fell sharply. Since then it fell even further. I'm only talking about the shares being traded in the US; however, the short interest fell from 337 million shares to 206 million shares between February and now. Last time Nokia had this little short interest, it was trading for $1.85 per share which marked the bottom. Are short sellers marking another bottom? We will see.
While I am upset with Nokia's decision to make its latest flagship phone exclusive to T-Mobile, I am optimistic with the company overall. The investors should stop expecting a "revolutionary" product every time a phone company launches a new phone. As long as a phone can add on top of existing phones and gets marketed correctly, consumers will buy it regardless of how "revolutionary" it is.
Currently, Nokia is barely breaking even when it comes to financials; therefore, it is difficult to value the company based on earnings. On the other hand, Nokia trades very close to its book value (1.4 times its book value to be exact; however, this number excludes Nokia's valuable patent portfolio), which implies that many investors still think that the company will go out of business. For this year, the analysts expect Nokia to post anywhere between a loss of 12 cents per share and a profit of 9 cents per share. There is definitely a lot of uncertainty regarding the company. Interestingly enough, 3 analysts revised their expectations upwards and 5 analysts revised their expectations downwards which continues to show uncertainty. Because the company already trades for near bankruptcy levels, I don't expect much downside for Nokia unless the business deteriorates greatly though.
I'll continue to hold onto my Nokia shares. If the price falls further, I may add more shares.