Nokia: Dispelling Attacks And Myths

| About: Nokia Corporation (NOK)
This article is now exclusive for PRO subscribers.

Recently, an article published here argued that the comparison of Nokia (NYSE:NOK) and BlackBerry (BBRY) is like a comparison of Kia and Audi where Nokia is said to be like Kia and BlackBerry is said to be like Audi. Normally, I don't respond to articles written by other authors with an article, but this article was so misleading to the investors that I felt the need to step in as a Nokia investor. In this article, I will attempt to respond to some of the accusations made against Nokia by an author, who apparently didn't do his/her research sufficiently before writing an article.

Not Apples to Apples

First, just because Nokia and BlackBerry are in the same industry doesn't mean their turnaround stories should be compared. This is certainly not an "apples to apples" comparison. Nokia offers many products and services alongside of mobile devices and it has over 100,000 employees; whereas, BlackBerry focuses on a few products and services and it has about 12,000 employees. This is very important to note, because it will take a much longer time to see turnaround results in a company with 100,000+ employees and tens of different products than a company with 12,000 employees and a few major products. A fair comparison would not be BlackBerry vs. Nokia, but it would be BlackBerry vs. Nokia's smart devices division. After all, Nokia's smart devices division is comparable to BlackBerry's company in size and function.

Blame Symbian

Second, much of Nokia's decline in smartphone sales is accounted for by the Symbian operating system. In the last quarter, out of the 6.1 million smartphones sold by Nokia, only 0.5 million were based on the Symbian operating system. Until now, the growth in Lumia sales was there to offset the drops in Symbian sales. In the first quarter of 2012, Lumia sales made up 16.81% of Nokia's smartphone sales. In the second quarter, Lumia sales made up 39.22% of Nokia's smartphone sales. In the third quarter, the percentage increased to 46.03%, in the fourth quarter it was up to 66.67% and in the first quarter of 2013, 90.16% of all Nokia smartphone sales were Lumias. In the last year, Symbian volume fell from 9.7 million per quarter to 0.5 million per quarter. From here, Symbian sales will be pretty much non-existent since they already hit the bottom, and the growth in Lumia sales will drive Nokia's growth rather than attempting to offset the fall in Symbian phone sales. In other words, Symbian phone sales can't fall below zero; therefore, Lumia doesn't have to worry about offsetting falling Symbian sales anymore. This is also why average sale price jumped from $185 to $248 and the gross margin jumped from 15% to 21% between the first quarter of 2012 and the first quarter of 2013. Meanwhile, Lumia sales are expected to increase by 20-25% per quarter for the next couple years.


2012 Q1

2012 Q2

2012 Q3

2012 Q4

2013 Q1

Total Smart Phone Sales

11.9 mil.

10.2 mil.

6.3 mil.

6.6 mil.

6.1 mil.

Lumia Sales

2.0 mil.

4.0 mil.

2.9 mil.

4.4 mil.

5.5 mil.







Profitability Issues

Third, the author argued that Nokia will not reach profitability anytime soon. I would like to know what the author means by "profitability" since there are different types of profitability. If the author meant "positive cash flow" by profitability, Nokia has already been achieving that for the 3 last quarters. If we are talking about operating profits, most of Nokia's divisions have already achieved that recently (with the exception of mapping business, also known as HERE). BlackBerry enjoys higher gross margins than Nokia, because (on average) its phones are more expensive than Nokia's and it generates money from software; however, that doesn't mean Nokia is in the dump.

Making Sense?

Fourth, the author doesn't mention what he or she means by Nokia being comparable to Kia and BlackBerry being comparable to Audi. Are we talking about consumer perceptions? Are we talking about growth rates? Are we talking about quality of brands? Are we talking about business models? No matter how we cut it, the comparison doesn't make sense. The author doesn't even explain how he/she came to the conclusion that Nokia is comparable to Kia. If we are looking at customer satisfaction, Nokia beats BlackBerry by a significant margin across carriers:

Where is Evidence?

Fifth, the article makes a lot of strong statements without backing them up by any substance such as evidence or rational. For example, the article says things like "There's no way Nokia will be able to keep up in the race" or "Nokia has become a poorly managed operation." In the US, Windows Phone has increased its market share from 2.7% to 5.6% in as short as one year. In other countries, we are seeing similar trends. For example, in the UK, Windows Phone's market share is up from 3.0% to 6.7% since last year. In Italy, Windows Phone represents a market share of 13.1% compared to the 5.4% of market share last year. In Australia, Windows Phone's market share doubled from 1.7% to 3.4%. Given the current trends, I don't see any substance in the argument that Nokia has "no chance of keeping up with the race." In fact, BlackBerry has been on the decline in terms of market share when Windows Phone has been increasing its presence in many countries across the world.

Is Mr. Market Always Correct?

Sixth, the article makes this statement: "Nevertheless, Nokia's supporters, mostly investors that have latched on to the company's cheap share price, forget why the stock is cheap in the first place. Here's a secret; it's not because the market is dumb." This statement assumes that market is highly efficient and it can price companies correctly at all times. We've already seen this not to be true many times. A lot of times, the worst performer of a year can be the best performer of the next year (for example Bank of America (NYSE:BAC) was the worst performer stock in S&P 500 in 2011 but the best performer in the index in 2012). Then we have examples like Ford (NYSE:F) that used to trade for as little as $1.38 per share 4 years ago. The market is not always efficient; in fact, the market almost always oversells and overbuys. This is how opportunities are created for long and short investors. Besides, the market punished BlackBerry just in the same way it punished Nokia; therefore, saying "the market punished Nokia for a good reason" is invalid.

Outdated Numbers

Seventh, the article gives false (or outdated) numbers. For example, it claims that Windows Phone's current market share is as low as 2.0%. The article doesn't mention whether this number represents the operating system's market share in the global market or a particular country. Currently, Windows Phone's market share ranges from 3% to 20% depending on the country.

Regarding Acquisition

Eighth, the article claims that BlackBerry is a better acquisition target for Microsoft (NASDAQ:MSFT) than Nokia. Currently, Nokia accounts for 80% of all Windows phones sold globally and Nokia has already demonstrated that it can make great phones that work perfectly with Microsoft's software. Also, Nokia's patent portfolio alone is worth as much as BlackBerry's entire company is worth. If Microsoft were to make an acquisition, obviously Nokia would make a much better option.

Take Home Message

Investors should be very careful when they conduct research about the companies that they invest in. On the internet, anyone can make claims but that doesn't mean their claims will hold value. Many people will lose money by listening to those didn't even do their homework on a company (for example, if someone writes an article about Nokia, they should at least know that the mobile devices division only makes up one third of the company and that the company has other lines of business such as Nokia Siemens Networks and the mapping business). I don't even think it makes sense to compare BlackBerry and Nokia's turnaround stories as there are many differences (as mentioned above) between the two companies.

BlackBerry offers high-end mobile phones and software service for (mostly) business people, whereas Nokia offers mobile phones of a wide range of prices and functionality to consumers, network services and products to companies, organizations, governments and mobile phone carriers across the world, mapping and GPS services in addition to licensing services to other technology companies who want to use Nokia's patented technologies. I've been an investor of Nokia for a while (by now everyone here knows it) and I recently purchased some BlackBerry shares in the pullback. I believe that there is enough room in the market for both companies to survive and prosper.

Disclosure: I am long NOK, BBRY, MSFT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.