re: Nokia specific excerpts from a Jubak article
>> 6 Stocks At Work On Tech's 'Next Big Thing'
Jim Jubak
Jubak's Journal
October 26, 2001
moneycentral.msn.com
So Where’s The Next Big Thing?
That’s the question investors skeptical of even the current crushed valuations of technology stocks have been asking for the last six months. Sure, technology stocks might have been worth 40 times earnings per share for some periods in the past, they agree, but that’s when revolutionary new technologies such as the PC, the wireless phone and the Internet were showing rapidly accelerating growth. Those technologies are mature now, the argument goes, and without the next big thing, growth rates for technology companies aren’t going to be anywhere near high enough to justify current prices, let alone a return to the sky-high multiples of the past.
Defining The Next Big Thing
The Internet, which isn’t really so much a thing as a network of mutually enabling technologies, is a classic example of this definition. I’d argue that the power of any "next big thing" is directly related to the size of the technology and product web it creates. So, for example, the Internet is likely to be a very long-lasting and powerful "next big thing" -- even though it doesn’t look like it at the moment from the performance of dot-com stocks -- because so many technologies participate in creating the Internet. The power of the wireless phone "next big thing," on the other hand, could prove to be relatively limited unless the next generation of wireless phones successfully draws in other technologies.
Don't Count 'Mature' Techs Out
The growth of any "next big thing" in technology is usually said to resemble a hockey stick. First, you see a long period of slow growth as companies build markets for a technology-dependent product. Then, if there’s widespread customer adoption, sales climb rapidly off the flat blade of the stick, into the curve of the handle, and then straight up the handle as sales and profits head for the sky.
You can see what happens to a technology company that follows this curve by looking back at Nokia’s numbers over the last six years.
In 1995, when wireless phones were a relative novelty in the United States, Nokia’s sales came to $8.4 billion. By 1998, sales had climbed to $15.6 billion. And in 2000, the level rose to $27 billion.
But as fast as the sales growth was, the increase in Nokia’s return on equity was even faster. In 1995, the company earned a return of 12.7% on equity. By 1998, that return on equity had climbed to 33%, and in 2000 it came to better than 36%. As wireless phones went from novelty to necessity, Nokia’s return on equity tripled.
Now, many would argue, the wireless-phone market has matured with sales growth heavily dependent not on first-time purchasers, but on customers’ willingness to replace their existing phones. And certainly the near-term evidence supports that view: Nokia, which started the year predicting industry sales of better than 500 million phones, recently cut its estimate for 2001 to 390 million. Sales in 2002 don’t look much higher -- Merrill Lynch recently projected industrywide sales of 410 million handsets in 2002. That would amount to roughly 5% unit growth.
According to Merrill Lynch, Nokia can therefore expect a slight but steady decline in profitability in its wireless-handset business over the next couple of years. Margins in that business, which were 20% in the September quarter of 2000, will fall to 18% in 2002 and to 17% in 2003. Earnings per share, projected by the Wall Street consensus at 65 cents in 2001 and 71 cent a share in 2002, will climb to just 79 cents in 2003. That’s roughly 10% earnings growth in 2002 and 2003. According to Merrill Lynch’s numbers, Nokia at $22 a share is trading at 28 times projected 2003 earnings per share. Hard to argue that a 10% grower is undervalued at a 28 forward multiple.
Skeptics make the same argument across segment after segment of the technology sector ...
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But a convincing argument can be made in favor of each of these individual technology stocks, as well. Thanks to its manufacturing and marketing skills, Nokia will be able to take market share from competitors even in a slow-growth environment.
But making those arguments for these individual stocks really does nothing to refute the basic argument of those who say that technology stocks as a whole are overvalued, absent "the next big thing." ... To make an argument for the technology sector as a whole at current valuations, you have to come up with at least some potential “next big things.”
In Search Of The 'Next Big Thing'
One possibility for finding "the next big thing" is to look at developments that might give new youth to mature technologies. The prime example of this is in the wireless business, where optimists are counting on new third-generation (3G) equipment and the new services it makes possible to revive handset demand. Optimists are also looking for the same kind of boost, but of a lesser magnitude, from the 2.5-generation equipment that will bridge the transition from current gear to true 3G networks. Nokia, for example, is expected to introduce new phones with camera capabilities, multimedia messaging and wireless Java software wrapped around a color screen at the end of November.
I laid out my disagreement with this optimistic scenario for wireless in a July 27, 2001 column, "Beware The Wireless Time Bomb." Suffice it to say here that I think the ramp for 3G phones is a lot longer than many investors think. I don't think cash-strapped wireless service providers are going to provide a full set of new services -- and invest in the infrastructure to provide them -- until they see that there’s enough demand to make the investment pay off relatively quickly. And of course they won’t be able to see evidence that the new services are profitable until they make the investments. I think we’re looking at 2003 before we have any inkling of what the true rate of adoption is and what level of return on invested capital the wireless service providers can expect from the new gear.
The second option is to look for a completely new "next big thing". ...
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At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: Dell Computer, Intel, LSI Logic, and Nokia. <<
- Eric - |
