Nokia vs. Motorola: Which is a Better Stock to Bet On?

As mobile penetration continues to grow around the world, handset manufacturers are likely to concentrate more on the Asia Pacific; China and India, in particular, are willing to adopt a clearer and long-term strategic approach to the deployment of mobile and related technologies in 2007.

Not only will call traffic increase, the Internet space and value-added services on mobile phones are expected to see heavy demand as well. With EM’s opening up this sector gradually, more investment is expected to come into this sector, and this will further drive growth of handset manufacturers.

I expect mobile phone shipments for 2007 to be around 1.2 – 1.22 billion units.

Certain trends are likely to be exhibited. Samsung is likely to concentrate on high tier handsets. LG Phillips (LPL) might turn into black in 3Q 07. BenQ will continue to struggle. However the biggest beneficiaries are likely to be a couple, namely Nokia (NOK) and Sony Ericsson. So the biggest question plaguing everyone is: what's going on with Motorola?

Mobile Behemoth Nokia, which sold more than 105 million handsets in Q4 06, and Black Horse Sony Ericsson are likely to take market share from others makers. Sony Ericsson is likely to pull out a couple of pages from LG and Samsung’s book and gain market share from them, while Nokia is sure to extend its lead over Motorola.

Motorola sold over 65 million mobiles in Q4 06 is surely to extend its OPM struggle to 2H 07. Ed Zander is too busy understanding the dynamics of the company and the exit of Ron Garriques doesn’t augur well for the company either. Probably investors realized that in early January when Zander warned about profits and forecasts, punishing the stock. It takes about 2 years for a handset to get into the market. Motorola formers Mike-Z, Ron-G did produce the Trendy Razr, Slvr, Rizr, Q and Zander took the credit. Now with neither of them in place it is to be seen what Zander has produced in his 3 years tenure.

Nokia vs. Motorola. Which is a Better Stock to Bet?

While Billionaire Investor Carl Ichan has increased his stake last week, Motorola gained some momentum. Investors mopped up the stock in hopes of 10.5 Billion cash kitty being lightened to some extent. This does not necessarily work in favor of a medium / long term investor. While too many investors are trapped in the $20-24 range over the last year, they should be more than happy to exit at every rise. The reasoning I give is this.

Q4 2006 Mess likely to spill over to 1H07

The only positive for Motorola is a $10.5 billion kitty. Unless this is put to better use there is no reason why the stock should appreciate beyond $19.5 before July 2007.

For Q1-Q2, Motorola is likely to disappoint again. They might just meet or beat their mid point of guidance, around $10.8 billion in revenues. With no new products in visibility your money is dead in Motorola for 1H07. Don’t be surprised if Motorola revises guidance downwards after announcing Q1 results to $47.8 billion in revenues from current $49 billion for FY 07.

On the other hand, Nokia is likely to improve OPM by 11-13 bps, thanks to a better mix of products sold in EM’s. Sony Ericsson and LG together are likely to take away 100 bps of market share from Motorola and Minnows. Samsung is likely to retain its position and seems better placed for 2nd half of 07.

I maintain “Outperform on Nokia” with a July-August Target of $22.5-$23 which is about a 7-9% appreciation from spot $(21.66 on March 9th 2007 in Nasdaq), and I maintain a “Neutral - Under perform on Motorola”, as it is likely to be a trading stock between $17.5-$18 in near term.