Goodbye Moto, Hello Nokia

It seems that Motorola (MOT) comes out with a good handset that everybody wants every five years or so. Considering that, we have a couple more years to go until the company will have another blockbuster handset again. This failure by Motorola is a big positive for Nokia (NOK) on many fronts.

Buy Moto, Hello Nokia. Or to piggyback on a well-known Motorola advertising tagline: Goodbye, Moto — and hello, Nokia.

First, it shows that Nokia’s management can execute despite not having the “hottest” phone on the market (i.e. Motorola’s Razr). Also, it will be further taking market share from Motorola; I estimate its margins will further improve, driving its earnings north of $2 a share over the next couple of years. After seeing Nokia’s second-quarter results, that estimate could come sooner rather than later.

The best part is Nokia doesn’t have to do anything heroic to achieve that goal. Operational leverage (higher volumes spread over fixed costs) and a shift to a higher margin (more feature-rich phones) will do the work. This was the driver of the company’s truly incredible operating performance in the second quarter.

The second quarter was simply spectacular: operating profit in every segment with the exception of its networks division grew in the high double digits, and sales climbed a whopping 28%.

At the current share price, you are not really paying for the network segment, in fact, since it loses money it detracts from the company’s valuation. But at some point its profitability will turn positive and the division will become a contributor to Nokia’s bottom line.

Samsung is a conglomerate, and although it’s a good one, it still lacks Nokia’s focus. Despite being located in a lower labor-cost part of the world, South Korea-based Samsung doesn’t have a cost advantage against Nokia, as Finland-based Nokia manufactures its phones all over the world, including in China. Nokia has proved to be the Dell (DELL) of cell phones from a cost-structure and manufacturing-efficiency perspective and Apple-like when it comes to innovation — it comes out with several dozen phones year after year.

There is still upside in Nokia’s global market share because Nokia has just a small market share in the U.S., accounting for only 4% of its volume. It is only a matter of time before Nokia starts taking market share in the U.S.; it has already started to design U.S.-centric phones.

As Nokia regains market share in the U.S., this will drive its global market share. Despite not having the phones in the U.S. that consumers seem to want, Nokia still has an excellent brand reputation in the U.S., so it just needs to fix relationships with U.S. carriers such as AT&T (T) , Verizon (VZ) and T-Mobile and start selling phones that the rest of the world is so crazy about.

Disclosure: I have a position in Nokia

NOK 1-yr chart:

Comments

[Tom B:]

Maybe as a short term play; maybe 1-2 years. I sure wouldn't want to be risking my money versus teh iPhone longer than that. BTW: Dell is a good analogy.

2007 Aug 10 11:11 AM

[Gemini1706:]

"I sure wouldn't want to be risking my money versus teh iPhone longer than that."

Wow.. I am sorry to say that, but this clearly shows that you do not understand the cellphone market (at all).
Nokia is booming globally with cheap phones, with almost no existance in north america, where your iPhone is trying to compete in the $600 range.. How is that has to do with $50-$100 phones?

And by the way, iPhone will be a mild success at best.
Looks like you go to a lot of Apple fan sites.

One phone is virtually nothing in the great scheme of things. Do you know how many models/flavors are produced by OEM each year? If you think one phone gonna rule, I would highly suggest to revise your 'market' analysis.

2007 Aug 10 01:22 PM

[Tom B:]

I think you are assuming that there will only be two (not one) iPhone models going forward. I think that's wrong; I expect other models.

"How is that has to do with $50-$100 phones?"

I think NOK may persist on the low end, but the low end has lower margins; thus, NOK's overall profit margin should decline over time.

"And by the way, iPhone will be a mild success at best.
Looks like you go to a lot of Apple fan sites."

I don't know; moving a million this quarter, which is expected, with increasing quarterly sales after that-- you would call that "mild"? What about in 6-12 months, when the GSM iPhone obliterates its competition in Europe and Asia? What about in 5 years, when ATT loses its exclusivity?

2007 Aug 10 03:22 PM