By Dave Nadig (rating 3.79) on 09:24 06.01.01
Stocks that Move the Market
NOK: No Finnish Line
So I'm sitting at lunch at last month's E3 gaming conference, making small talk. A tall, gangly, blond guy sits down next to me and introduces himself. The accent is unmistakably Finn. Unsurprisingly, his nametag said "Nokia."
Me: "So what do you do for Nokia?"
Finn: "I am a game designer!"
Me: "Neat! So you make those little handset games people play on the bus?"
He looked at me like I'd asked whether he ate dog food for breakfast.
Finn: "No, Nokia is launching a console - the media terminal."
Me: "Really! So what does that mean?"
Finn: "It is a living-room device for accessing the Internet, playing games, recording video, playing music."
Me: "So it's a set top box."
He stopped talking to me after that. I had committed the deadly sin of stereotyping his world. But inside that conversation is every reason why we have not advised our funds to own Nokia at the moment.
First off, the company is the Gorilla in cell phones, no question. This morning's Wall St. Journal presents statistics that firmly lock Nokia into the 800 pound gorilla. They highlight a Gartner group report claiming Nokia's marketshare at 35.3% in handsets, up from 33.9% just a quarter ago. At this rate, within a few years they will truly have a majority share.
But Nokia has big dreams and bigger goals than simply selling lots of cool handsets. They've invested all over the place. Fixed wireless, firewalls, broadband IP equipment, and a venture capital fund. None of these explorations has near the potential that their cell phone business does. But even more troubling, Nokia has jumped into the 3G camp with both feet. Recently, they agreed to finance a nearly $2 billion 3G buildout for a single customer - Orange. I'm just not enough of a believer in 3G to bet alongside them. I have yet to be convinced that there is any real demand for next generation services that will actually generate the next generation revenue that's implied in these kind of buildouts. But Nokia is deaf to these concerns. Like my Finnish friend, 3G believers turn to another topic when approached with this issue. And I understand - right now it's all just faith. No one has proven the demand and business model for 3G either for or against.
Nokia bulls are quick to point out that this company is becoming the Microsoft of wireless - and they're right. And for a long long time I was in the Nokia bull camp for this reason. Their market share is only going to get better. They execute like few other companies. Their operating margins are wonderful. But I don't think Nokia can remain immune to the global economic slowdown forever. I also don't think they can bridge the gap between the plain-old-cell phone business of today and the ill-defined and speculative 3G business of the future without a hiccup.
But heck, if you're a Nokia investor, you've had a pretty good ride recently along with the rest of tech. The stock is well off its March low at 20.55 and peaked its recent run in May at 35.50. Alas, the stock has given up half those gains as the tech market fell to the axe in the last few weeks. It's now pinched between a tenuous uptrend (thin blue line) and a marked downtrend. Neither line is particularly strong (both are two datapoints). My guess is that the strong numbers from the Journal this morning keep an uptrend alive. But over the next few months, I think Nokia languishes despite the market share news. |
