In a previous article, I argued that Nokia (NOK) needed to sell roughly 44M Lumias annually to break even in its smart device division. If it broke even, and the other divisions maintained their income, Nokia would roughly trade at a P/E ratio of 13.
I received several responses to the article, and many believed the 44M figure was a realistic target for 2014. While there were many valid arguments, there was at least one argument that stroke me as being based on wrong information. It went something like this:
Nokia has a strong position in emerging markets where growth prospects are higher. Thus, if it just maintains its market share in emerging markets, its global market share will increase.
But as I will argue in this article, this is very likely to be based on wrong information as Nokia's smartphone sales in emerging markets have declined significantly as well.
Methodology: Estimating Emerging Markets Sales
Nokia doesn't report sales and revenue figures for smartphones on a regional basis. Instead, it reports emerging markets sales for its D&S (Devices and Services) division, which include sales of both smart- and mobile phones, and Nokia also reports total sales of smartphones and mobile phones separately (but not on a regional basis).
While we can't see the exact unit- and revenue sales for its smart device division on a regional basis, I have developed a method to come up with an approximate estimation. Below are the steps I took:
- Rather than assuming that consumers in developed markets are equally as likely to buy a mobile phone as consumers in emerging markets, I used a multiplier to take into account that mobile phones in lower income countries are more popular.
- To estimate unit sales for smartphones on a regional basis, I used this calculation; Smartphone sales in region X = D&S sales in region X/D&S sales in all regions * Multiplier for region X
- To estimate revenue for the smart device division on a regional basis, I estimated mobile phone revenue for each region and subtracted those numbers from the revenue figures for the D&S division (which includes both smartphone and mobile phone revenue).
- To estimate revenue figures for the mobile phone division, I simply assumed that the mobile phone ASP for each region was equal.
- Smart device division revenue can now be calculated on a regional basis by subtracting the estimated mobile phone revenue for each region from sales of the D&S division.
In the below graph, you can see my estimations for Nokia's smartphone sales in emerging markets. Sales in the emerging markets have declined at almost at the same rate as sales in developed markets, and over the last year Nokia has only sold 14.2M smartphones in emerging markets. That is equal to a market share of roughly 3.1% (using IDC's emerging markets numbers).
Sales have started to improve a bit since Q3 2012, but if the 44M target is to be obtained, sales need to almost double, and given the current growth rate, that seems to be highly unlikely.
In terms of revenue, we can see that it is higher in developed markets. This is likely explained by the more expensive 8xx and 9xx models being more popular, which increases the ASP.
Does that mean Nokia can't benefit from emerging markets?
Of course we can't rule out the possibility of Nokia increasing its popularity in emerging markets. We are already seeing that the Lumia 520 is becoming quite popular in countries like India. It is also important to remember that the 14.2M figure excludes the Asha line, which isn't classified as a smartphone, even though it still competes with many of the low-end Android phones.
Nevertheless, I think it is fair to say that Nokia at the moment doesn't have a strong position in emerging markets, and thus it will have to increase its market share in countries like India and China significantly if it want to benefit from the growth prospects in those countries.
Further, it is important to note that the 44M target assumes that the gross profit per smartphone is somewhat stable. If Nokia only obtains the figure by higher discounts or due to increased popularity of the low-end Lumia Phones, the gross profit per smartphone is likely to decrease significantly, which will require even higher sales than the 44M.