Courtney Smith
Betting on the biggest
Nokia dominates cell phone industry
By Courtney Smith, CBS MarketWatch
Last Update: 4:07 PM ET Sep 28, 1999
NEW YORK (CBS.MW) -- To paraphrase the writer Damon Runyon, the race may not go to the swiftest or the fight to the strongest -- but that's the way to bet.
In investing, that means that you want to identify the
market leader and bet on them, particularly in technology investing.
Being number one in a particular market gives you a lot of power. You control the agenda of that industry. You set the pricing structure. People who want to buy a product tend to go with the biggest name in the industry. The big get bigger. The strong get stronger.
In cell phones, the biggest player is Nokia. They are the horse to back in the exploding cellular phone handset market. Based on industry research, I expect the total handset market to be about 250 million units this year, 350 million next year, breaking 1 billion by 2003.
Nokia has 23 percent of this market, with Motorola next at next at 20 percent.
But the market is very fragmented. There are a number of
competing standards for cell phones. Europe has
pretty much standardized on Global System for Mobile Communications.
The U.S., however, has several standards. First there was the analog phone but that has passed by the wayside.
Now, the battle in the U.S. is between Time Division Multiple Access and Code Division Multiple Access. CDMA is considered to be the technologically superior model because the sound is clearer. TDMA will continue to grow, but not as quickly as CDMA.
Japan has another smaller standard that is being phased out. The industry is trying to develop a new standard for the whole world called 3G for Third Generation.
Right now, Nokia completely dominates the GSM and TDMA markets. Samsung Electronics is the largest producer of CDMA phones, but Nokia is growing faster than anyone else in that arena.
Research and development
Why is it growing so fast? I believe it is because
Nokia is the company most focused on cell phones.
They allocate 8.8 percent of their total revenues to
research and development. They are light years
ahead of anyone else.
As a result, they are the technological leader. They
are also pushing their competitors by coming out
with new phones every year while the competition
only releases new products every 18 months. They
are continually improving their products and
leapfrogging the competition.
All this excellence is paying off. They were recently
voted the 11th most valuable brand in the world,ahead of such such names as BMW and American Express.
Earnings growing
The bottom line is that Nokia's earnings are growing at a rate that will exceed 40 percent this year. They should be able to maintain a 30 percent growth rate for several years.
A major boost has been the resurgence of the Asian and European economies because Nokia is a major producer of telecom equipment. Revenues grew by an astounding 31 percent in the latest quarter mainly because of the rebound in Europe and Asia.
The price to earnings ratio is over 42, but I think it is justified given their great prospects.
I like Nokia because they are the swiftest and the strongest. And that's the way to bet.
Courtney Smith is the chief investment strategist of the Orbitex Group of Funds, editor of Wall Street Winners, and editor-in-chief of Commodity Traders Consumer Report.
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