Apple Sitting Pretty While Nokia Burns

|
 |  Includes: AAPL, NOK
by: Stephen Rosenman

In an internal memo, Nokia CEO Elop compared the company's situation to a man standing on a burning oil platform who must jump into the freezing waters of the North Sea to avoid certain death. Investors took the cue and sent the stock on a 14% dive. (At least Mr. Elop didn't propose fiddling while the company burned; that metaphor might have sent the stock down even further.) Wouldn't it have been nice to have ducked this ugly move in Nokia? Avoid the pain of owning the stock and learn to dodge the next Nokia.

There were tell-tale signs warning that Nokia was an inferno in-waiting. Nokia has been sounding a fire alarm for years. The company's profits on each mobile phone it sells has dwindled while its over all sales volume stalled, a pattern that has been inexorable and dramatic. Contrast that to Apple, a company that stole Nokia's proverbial lunch money. Apple has accomplished everything Nokia hasn't been able to do: accelerating phone sales while increasing its operating income. The iPhone has helped Apple make more money from each device it sells. Certainly, if Nokia is standing on a burning platform, isn't Apple sitting on a oil well gusher?

For a company to be wildly profitable and have a strong future, it must have a surging sales volume or be increasing the money made on each sale. It doesn't matter what you sell -- turnips, ships, cars, ice cream cones, you have to follow this economic rule. Sell more of something, earn more on each sale, or both, or you're toast. In this study, we look at all products as "devices". Here, devices are Nokia's mobile cell phones and Apple's iPhones, iPads, iPods, and computers. Nokia failed to increase its sales volume or operating income per device. Apple delivered in both volume sales and operating income on each device sold.

Compare Nokia and Apple with two metrics: the first, volume of devices sold and second, the amount of money made on each device sold.

Let's look at the number of devices Nokia and Apple were able to sell. Nokia's volumes have plateaued.

<a:>
While Apple's ramp up.
<a:>

Apple sold an ever-increasing slew of products, no let-up in sight.

Now, let's look at Nokia's operating income it makes from each device it sold, a metric I call operating income per device (OPD).*
<a:>

Since 2007, Nokia made less and less money on every mobile phone sold. In 2009, Nokia earned 7.7 euros ($10.42) in operating income for every phone sold. That miserable number explains why Nokia is standing on a burning platform. Once you saw the plunge from over 17 euros ($23.42), it was the time to jump.

In sharp contrast, Apple has been increasing its operating income per device sold, climbing over $160 a device.
<a:>

Apple is improving its earnings for each device it sells. In fact, Apple makes over 8 times as much as it did 5 years ago on every product. Nokia has more than halved its profits per device. Again, look at the move from 2008 to 2009, an increase in operating income per device from $80 to almost $140, a clear tell to buy.

How do you avoid the next Nokia? I suggest looking at sales volume and operating income per device. The two metrics screamed "sell" Nokia and "buy" Apple in 2009. Listen to volume and operating income per device. Otherwise you could be faced with a dilemma similar to that faced by Nokia's unfortunate shareholders: burn or drown.

*Operating income per device refers to operating income divided by the total number of devices sold. In Nokia's case, devices are mobile phones. Operating income is from their mobile phone division. For Apple, devices are the total number of iPhones, computers, iPods, and iPads. Of note, the charts for Apple do not include Q1 2011. Apple's operating income per device improved to $167 in Q1. Apple sold 47 million devices last quarter, on its way to setting another record for 2011.

For more information on operating income per device, see here and here.

Disclosure: I am long AAPL.