Why Nokia's a Buy The cellphone leader has hit the rails, but there's still plenty of hope for the Finnish line. And that's a great opportunity for investors. By Janice Revell
Every cellphone user has experienced the annoyance at one point or another. The cellular connection is suddenly "dropped," mid-sentence, on your important phone call, and seemingly for no reason at all. That must be something like the frustration that shareholders of Nokia (NOK, $14) feel�all the time. The world's largest manufacturer of mobile phones seems to be in a perpetual state of dropped when it comes to its stock price. The troubles began in April, when the Finnish company announced that its first-quarter sales had fallen from the previous year and that market share had slipped�despite the fact that the overall market for cellphones was growing at a red-hot pace. Just a few days later the company issued more bad news, warning that second-quarter earnings were likely to fall short of analysts' estimates. The market's reaction was swift and severe: By mid-May, the share price for Nokia, which trades on the NYSE as an ADR, had nose-dived by about 40%, to a 14-month low. It has barely recovered since then.
To be sure, there are good reasons many investors remain spooked about Nokia. There's the company's recent decline in global market share for wireless phones, for example, which industry researchers say fell from about 35.2% to 29.7% during the first quarter of 2004. (Nokia itself puts its market share at 32%, still a hefty decline.) Revenues have stagnated as a result. Analysts expect the company to bring in sales of about $35 billion in 2004, virtually unchanged from last year's performance.
A key contributor to Nokia's sagging share has been its reluctance to produce the clamshell-style flip-top phones that have become increasingly popular with consumers and are offered by its two largest rivals, Motorola and Samsung. Until very recently the company had clung to its traditional (and clunkier) candy-bar-shaped design.
It's a strategy that served the company very well in the past: Just as a car manufacturer can reap enormous cost advantages by producing multiple models from the same basic chassis, Nokia has likewise been able to keep production costs low by cranking out a huge volume of phones, all of which are variants of the same basic candy bar. But as consumer tastes have evolved, the strategy has backfired. Clamshells now account for about 30% of all new cellular phones sold�more than double their share a decade ago�according to Mark Davies Jones, an analyst with J.P. Morgan Chase.