Needham & Co.’s Charlie Wolf this afternoon raised his rating on shares of Nokia (NOK) to Buy from Hold, witha $7.30 price target, or €5.50 for the ordinary shares traded in Helsinki (NOK1V), following a Q4 report this morning that was in line with Nokia’s pre-announcement two weeks ago.
Nokia sells the Lumia 920 at an unlocked price of 338 Euros, the Lumia 820 at an unlocked price of 300 Euros, the Lumia 710 at an unlocked price of 225 Euros and the Lumia 610 at an unlocked price of 169 Euros. Assuming equal sales of all four models, the average price of Lumia phones could rise to 258 Euros. According to iSupply, the bill of materials cost (BOM) of the Lumia 920 is 163 Euros. Using this cost as our benchmark, we can compute the costs of the other three models, as shown in Figure 2. With the addition of other non-BOM costs equal to 35% of BOM costs, the gross margin on the 920 equals 34.9%.1 It’s reasonable to assume that the gross margins on lower priced Lumias are less than this. If we assume an equal weighting of the different Lumias sold, the average gross margin equals 30.9%. We suspect that Lumia 920s make up the bulk of current sales. But that should change as lower priced Lumia models invade emerging markets [...] The prospect that the average price on Lumia smartphone sales could rise to 250 Euros by the fourth quarter of 2013, up from 186 Euros in the fourth quarter of 2012, and that the gross margin on these sales could approach 30%, up from 18% in the fourth quarter of 2012. We’re forecasting only 17% smartphone unit shipment growth in 2013, which is about half the forecasted growth in the smartphone market. But this translates into 65% revenue growth because of the rising average selling price. Our 2013 forecast of the financial performance of mobile devices, location and commerce services and Nokia Siemens Networks remains subdued.
What the buy recommendation fails to mention is all of the other costs associated. Gross margin is the crudest form of measuring profitability. It simply takes into account the difference between the selling price and the cost to make the product. Operating margin is even narrower as it takes into account the costs of paying workers, advertising, and other over head. Net margin is the narrowest as it i takes into account interest, currency exchange rates, etc.
Nokia's operating margin for Q4 was 1.3%. Expected margin for Q1 is -2%. You do the math.