Nokia and the Bandwidth Bubble Bust (and Recovery)
GradB,
<< I remember, in Sep 2000, he [Paul Sagawa] issued a report forecasting the communications sector downturn. He nailed it. >>
He sure did. At that time everyone was waiting for an inevitable big rebound off the summer lows and he sounded the alarum bell loudly and clearly based on a very soundly based analysis and a projected significant slowdown of capital spending by carriers globally and if I recall correctly he downgraded CSCO, ERICY, LU, MOT, NOK, NT, and others in one fell swoop ...
"Current 2001 consensus EPS expectations for a universe of 143 communications equipment companies assume an average 28% increase vs. 2000. If our projection of 19% industry revenue growth [in equipment spending] is close to accurate it is likely that a majority of these companies will disappoint in 2001."
- Paul Sagawa, September 28, 2000 -
They surely did.
A few months later Alex Cena of SSB -- one of my favorite analysts covering comms during the Y2K meltup -- picked up on that theme although in September he was still extremely bullish on prospects for comms equipment manufacturers.
Ironically, Sagawa's prophetic report was issued less than three weeks after George Gilder finally published his eagerly awaited 'Telecosm: How Infinite Bandwidth will Rule the World' which listed the 'Nine Stars of the Telecosm' -- BRCM, GBLX, JDSU. LVLT, LU, NT, QCOM, TXN, and AVNX, in Appendix B.
Global Crossing was soon to be history and JDS Uniphase, Lucent, and Nortel, are shadows of their former selves. Dick Sears who follows the 'Gilder Technology Index' (GTI) as a labor of love reports that the GTI fell 94.1% from its March 6, 2000 high to its October 9, 2002, low, and pity the folks with unbalanced portfolios that were not only heavily into them but also heavily margined. Fortunately for those that never sold some of their Gilder treasures, or that took advantage of buying opps in 2002 or early 2003, he shows the GTI up 130% in 2003, 3% in 2004, 5.1% in 2005 and up 23.1% in 2006 YTD.
It is unfortunate that back in the fall of 2000. Grahame Lynch had not yet published the 'Bandwidth Bubble Bust: The Rise and Fall of the Global Telecom Industry' [July 2001] which chronicled the fiber glut. Short and sweet, but well documented, and truly scary in retrospect.
Techs are enjoying a nice run but personally I took down NOK 50% on Thursday at $21.25, CSCO down 50% at $22 on Friday, QCOM down 50% at $49.86 a few weeks back, TXN down 50% at $32.50 late last year and recently sold 75% of the JDSU shares that I acquired last year at $1.35 for $4.10 and got out of my LU flyer altogether. These could all run higher into earnings and even beyond but I'm content to pocket substantial profit, and I think we'll see a tech pullback in summer. If we do, I'll probably add some of these back in some portion, but I officially retire on June 30, and consequently I'm in the middle of a complete portfolio overhaul with considerably more income orientation. Fifteen months ago I was about 50% invested in individual equities or growth funds - down from 80% at the end of 1999 when I started to pull back to cash, albeit not as quickly as I should have -- but by end of year that number will be 25% to 30%.
<< Paul Sagawa has been a Nokia bull for five years. I guess, as a former McKinsey guy, he's a stickler for things such as sustainable competitive advantage. >>
Having worked for a few McKinsey alums, I buy that. While we were right to question it in the spring of 2004, Nokia certainly has sustainable competitive advantage.
In a highly competitive, dog eat dog industry, where market leaders can't nap for long and can't take their eyes off the ball or cast them ahead of the ball, Nokia not only has the requisite scale advantage and great strategic partners, but they also have a complete set of well developed core competencies that are simply unmatched in the handset industry. I think their operating margin targets are both reasonable and attainable -- but they are key.
They do need to continue to plug away on the infrastructure side that Ericsson dominates. With Siemens vacillating about what to do with the infra side of their business, they have to grind that one out and they appear to be dedicated to doing that.
What Nokia has done on the UMTS (WCDMA) side of their handset business in developed markets concurrent with dominating emerging markets, is very impressive to me, but they still need to work on the mid-range sweet spot. They may have had (did have) timing issues on some aspects of product renewal but what they have done with WEDGE handsets, underpinned by a new terminal platform (or platforms) and exceptional software platforms is a great example of right product and right timing, and there is no reason they shouldn't be able to increase global share this year and again next year. On the down side they have to do something about the cdma-centric US and fortunately they know it, although recognizing a problem and correcting it are two different matters. The spin of their CDMA business unit seems to make sense and it should increase margins, even if somewhat artificially, but there are a lot of unanswered questions in my mind about how that will work out over the long haul.
<< I always liked hearing him lob softball questions at Jorma during the conference calls. >>
He obviously does his homework diplomatically asks timely and very complete and well formulated questions and as a consequence he's really been able to draw out many corporate leaders -- including Jorma recently -- on their IP stance in the last few years. He pinned Håkan Eriksson on that pretty well at Ericsson's Capital Markets Day a year or so ago. Earlier that year at a Bernstein event he conducted a relaxed one on one interview with Pekka Ala-Pietilä who would have been my choice to succeed Jorma (although OPK certainly deserved the shot) and it was a superb webcast. One of the best I've ever heard and very timely for me because I was heavily into DD on Nokia trying to decide whether to reenter NOK, which I did not too long after, but after they shed several more $$$ of share value. Essentially Paul lead off with a series of questions probing the market share loss of Q1 2004 and Nokia's plan to rebuild it, and Pekka responded with complete candor and great intelligence, convincing me that they not only recognized their problems but were doing something about it.
I'll miss Pekka and I'll also miss Pertti Korhonen, whose departure was something of a surprise to me. I was pleased, however, to see both Niklas Savander and Tero Ojanperä moving up to the board. No flies on either one of those talented guys.
Speaking of comms analysts I just noticed last week that former Ericssonian Matt Hoffman who after leaving Gartner Dataquest spent some 5 years with Soundview (and Schwab Soundview) before moving on to Moors & Cabot where he had rather low visibility, is now with Cowen & Co. covering Brightpoint (CELL), ID Systems (IDSY), Motorola (MOT), Novatel Wireless (NVTL), QUALCOMM (QCOM), and Sierra Wireless (SWIR). He's also listed on Nokia's site as covering Nokia.
Best,
- Eric - |
