RBC's Analysis Of Nokia Is Questionable

 |  About: Nokia Corporation (NOK), Includes: MSFT
by: Charles Santerre

I do feel sorry for analysts. It's a difficult profession to predict the future. After reading RBC's (NYSE:RY) opinion on Nokia's (NYSE:NOK) current quarter, I was not pleased. As a Nokia shareholder, I was interested in poking some holes into the piece written by Mark Sue. Since the analysis is only available to RBC investment account holders, I cannot provide a link that would enable you to read the whole document, but I will quote from some passages.

Mr. Sue says in his opening paragraph: "A glimpse into Nokia's new product line for the fall leaves us uninspired."

While you cannot discuss personal tastes, many people believe the current flagship Lumias are the best handsets in the world. The 928 improves on the 920 with a xenon flash and three high amplitude microphones for recording distortion free sound in very loud environments. It is thinner and lighter for those who had to get a gym membership to hold the 920 for longer than 30 seconds at a time. The newer 925 uses an aluminum frame, and is also thinner and lighter than the 920.

Feature Phones

Mr. Sue goes on to say: "Worryingly, Nokia's historically profitable feature-phone business is eroding as well."

While this is a legitimate concern, it is certainly not new. The decline of the feature phone has been ongoing for years , well before it was highlighted in this analysis. As a shareholder, I can easily tell that Nokia is well aware of the shift that more people are aspiring to smarter phones. That is why the Asha full touch line was created. It provides a smartphone experience that can be purchased outright for less than US $100. It is also the least expensive to operate with a longer lasting battery and data compression available in its browser and several social apps. In the best scenario, the Asha full touch would have been produced earlier on to help Nokia stay ahead of low cost Android producers. Using 2012 as a reference, while sales decreased in the Mobile phones division in Q1 from the previous quarter, the trend was reversed in Q2, as was pointed out in Nokia's latest quarterly teleconference. Nokia needs to keep innovating in mobile phones to squeeze as much revenue as possible while the trend continues towards smarter phones.

Carrier support

"Carrier support may further dwindle for Nokia, which has been donating market share…", says Mr. Sue.

When speaking of market share the analyst is well aware that a new line of phones with a new operating system (OS) cannot jump past market leaders from a standing stop. Microsoft's (NASDAQ:MSFT) Windows Phone 8 is the first version of the OS in which Nokia has been involved with from the beginning, and its products only started selling six months ago, in November 2012. As far as the previous version, Windows Phone 7.x, the OS was already designed before Nokia produced its first phone. It was too late for the phonemaker to put its footprint on it. Therefore WP8 has to gather momentum, as it is currently doing, before it can take share back from its competitors.

As far as carrier support is concerned, it is increasing, at least in the US, as Verizon (NYSE:VZ) added the Lumia 928 to its portfolio after having sales success with the 822. T-Mobile (NASDAQ:TMUS) has also added the Lumia 925, after selling out numerous times with the 521. The International Business Times has proclaimed that a Windows Phone will appear on Sprint in early 2014, without confirmation on the choice of manufacture, although it predicts it will be from HTC.

If Mr. Sue is referring to carriers elsewhere in the world, he does not mention any. In fact his whole analysis is void of any reference. His entire analysis seems to be based on personal opinion only, including his prediction that Nokia will warn investors that it will not meet its Q2 guidance.

Having the choice of believing either Mark Sue of RBC or guidance from Nokia, I will put my money on the people that I believe should know the pulse of sales of their own products around the world. During the Q1 earnings teleconference, Nokia called for a larger than 27% increase in smartphone sales for Q2.

Higher rates of return

Mr. Sue says: "After an initial spurt, Nokia's 920, 720, and 520 may now be fading, and we're noticing a higher than normal rate of return."

It is my opinion that if you are going to provide an analysis that will influence some shareholders to buy and sell stocks, you should at least give some kind of idea to readers how you arrived at a conclusion of "higher than normal rates of return." I believe that a respected bank such as RBC should require its analysts to divulge their research methodology for arriving as such impactful conclusions. I cannot think of any reason for not doing so unless the research is so highly inadequate that it risks being a source of embarrassment for the bank.

One Finnish smartphone retailer has taken it upon itself to publish stats that contradict Mr. Sue's opinion on Lumia's rates of return. In that article it is said that the Lumia 920 has a rate of return of one tenth of the iPhone 5 and half of the Galaxy S4.

Perhaps this is why RBC does not go out on a limb to lend any credence to Mr. Sue's report when it says "the rating assigned to a particular stock represents solely the analyst's view". And "All of the views expressed in this report accurately reflect the personal views of the responsible analyst(s)." To me this is not an endorsement.

Smartphone Design

"Feedback on the upgraded Lumia 925 and Lumia 928 remains mixed, with consumers pointing to the devices' derivative design", goes on to say Mr. Sue.

If the Lumia 925 and 928 have a derivative design, the same can be said for the complete line of Galaxy Series by Samsung (OTC:SSNLF) and iPhones by Apple (NASDAQ:AAPL). If there is one quality Nokia is still renowned for, it is for its beautiful and sturdy designs. I have even criticized them in an earlier article entitled Nokia's Challenger Checklist for spending too much on quality in their handsets while it does not seem to be such a high priority for their competitors. In any event, the Lumia 925 has not yet been released, so it's too soon to obtain real feedback. The 928 has only been available for three weeks now. To date the average rating on Amazon is 4.5 stars out of 5.

The most damning element included in the analysis written by Mark Sue is a graph illustrating his rating for Nokia from 06/03/10 to 04/18/13. An Outperform rating was given from 09/10/10 until 04/19/12. Then a Sector Perform rating was given from 04/30/12 to 04/18/13. In other words, while the share price was diving down from $9 to $3, in a two year period, he gave it one notch below its highest rating. From April 30, 2012 to April 18, 2013, while the price continued down to its lowest point in Nokia history at $1.63 and then back up to $4.60, he brought its rating down one notch to Sector Perform.


No one can predict the future. In no circumstance should any investor rely solely on a report from an analyst to decide whether to buy or sell a stock. Conduct your own research. Reading transcripts of quarterly teleconferences provided free of charge by Seeking Alpha is a good starting place.

In conducting my own research on Nokia, I conclude that sales momentum seems to be increasing in its Lumia range of phones if you examine performance in past quarters and company guidance for the current quarter. Nokia Siemens Network has also put together several profitable quarters in a row. As far as sales in mobile phones and HERE maps, they are unpredictable from one quarter to the next. Revenue for mobile phones depends largely on the timing and marketing of new products by Nokia versus offerings from competitors. HERE maps depends on making the product more and more attractive and the ability of sales personnel to get long term commitments from clients.

Most reports have recently indicated that Windows Phone is increasing its market share, thanks in large part to its least expensive smartphone, the Lumia 520 and its variants. If company guidance is correct for Q2 and the Lumia 928 and 925 sell well in Q3, the share price should increase from its present level. If future product launches in the coming months are successful in Q4, typically the highest sales quarter for smartphones, perhaps the share could finally surpass that elusive $5 mark by reporting time in mid-January, 2014.

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.

Additional disclosure: Long since mid 2011.