MKM Partners analyst Tero Kuittinen Thursday morning launched coverage of Motorola (MOT) and Nokia (NOK), both with sell ratings.
Kuittinen’s broad view is that the handset market is likely to continue to produce disappointing financial results. While he says smart phones can continue to grow units at 25%-30%, consumer spending will remain :”challenged,” leading to “a tepid rebound in overall handset sales.” He says ASPs are “likely to disappoint, leading to meager revenue growth at best in 2010,” and asserts that “investors have yet to price this risk into their models.”
Kuittinen ticks off a list of signs that the handset market is in trouble:
- HTC revenue warning.
- “Tepid” early demand for Android handsets.
- Palm Pre “softness.”
- European demand shift from luxury phones to cheap touch-screen devices.
“We believe the barbell growth theory - the low and high ends of the phone market poised to expand simultaneously - is wrong,” he writes. “Instead, we see signs of cheap touch-screen models cannibalizing the high-end smart-phone market.”
The analyst sees mid-single-digit unit shipment growth in 2010, following a decline of 7%-10% this year. He says that is likely to disappoint investors, noting that a decline in 2001 was followed by a 16.5% unit growth year in 2002. Kuittinen thinks rapid price erosion is likely in 2010, with an even more pronounced slide in 2011. Combined that with weak unit growth, he contends, and industry revenue performance is likely to disappoint.
As for Nokia, Kuittinen starts the stock with a price target of 7 Euros, well below Wednesday’s close at 9.20 Euros. He thinks 2009 EPS will disappoint: he sees 40 Euro cents a share, well below the Street at 54 cents. He asserts that the company is in the middle of “a particularly ugly transition period,” with key product lines suffering from “badly aging display and user interface technology.” He sees a strong comeback in 2010 for the company, but adds that he remains “wary about timing.”
Kuittinen takes a harsher view of Motorola, setting a price target of $5, well below Wednesday’s close at $7.53. Basically, he thinks the company’s big move into Android-based handsets is already shaping up as a failure. “We believe Motorola’s turnaround will take longer than expected and the competition will be more brutal in key segments MOT is counting on for its comeback,” Kuittinen writes.
The MKM analyst reports that just a few months ago, expectations were that Motorola would launch five models based on Google’s (GOOG) Android operating system: two each for AT&T (T) and Verizon (VZ), and one for T-Mobile. But he contends that the AT&T models have been canceled, and that Verizon has pushed one of its models into 2010.
The loss of AT&T as a distribution partner “changes the winter outlook for Motorola dramatically,” he writes. The analyst contends that the success of the $99 Apple iPhone, combined with a possible November launch for a $99 Palm device called the Eos, could put AT&T in a situation where the $100 price level “is already full of models featuring very advanced software and display technology.”
Kuittinen says the two models Motorola was developing for AT&T, code-named Sawgrass and Heron, were prototyped using Windows Mobile, and that remodeling them using Android added so much development time that they looked dated before birth. He says Sawgrass was supposed to target teens, with Heron aimed at college students and young professionals. “These devices could have played a pivotal role in Motorola’s game plan of creating a range of Android models, focused on social networking - Twitter and Facebook in particular,” he writes.
Finally, he notes that Verizon’s model is expected to be more expensive, at $199 at launch; the price tag could be too high for a phone he says is targeted at a youth demographic. He says the phone is likely to feature a graphics accelerator capable of 3D gaming performance that exceeds the Sony (SNE) PSP handheld - while an “impressive accomplishment,” he thinks the intended price is going to look high versus rivals.
In Thursday’s trading, MOT closed down 14 cents, or 1.9%, to $7.34; NOK closed up 50 cents, or 3.8%, to $13.63.