Venting, Part II

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By thedumbox
April 17, 2001

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How about some thoughts and opinions of yours about NOKIA.

I've actually expressed a few thoughts about NOK amongst the clutter, but I'm not surprised you missed them. I have around 400+ shares at an average of about $24 a share, and awhile back I expressed concern with the valuation. NOK is a marvelous company and it has one of the finest management teams around. The ability to make money in a business is a valuable skill, and current management has it. I bought NOK at a higher valuation than probably any other stock I've ever bought, except for some damaged work-out type situations.

But there are some serious dangers with the stock, some related to the future of the market and some related to its current valuation.

Whatever is going to happen in the future with wireless is a spectacular gamble. I have no idea what the future will look like and who'll come out a winner. I have no idea if the winners will actually wind up making any money. I'm fairly sure some of the players are going to go broke. We may ultimately wind up with a scenario where a few dominant providers (one of which may or may not be NOK) make super-competitive profits, or we may wind up in some kind of bad replay of the airlines and the current long-distance situation -- too many competitors chasing too few dollars.

NOK has a history of being able to change rapidly to meet new markets and succeed -- but so did MOT until a couple of years ago. And it's possible that, as in the case of the airlines, we'll wind up in a situation where even the best-run company ends up making peanuts. In the technology field, it only takes one miss to turn you from market leader to also-ran.

I also doubt that the NOK brand -- which a lot of people put value in -- is worth much. A couple of years ago ERICY had 40% of the market, and it was a bigger name than NOK. Today it has, what, 10%? Can you imagine that happening with soft drinks or razors or banks? A company going from 40% to 10% in three or four years? I seriously doubt there's any long-term brand loyalty in this area. NOK's future is going to depend on (a) technological quality and price of its products, and (b) fashion.

As to technology, NOK only has an edge if it can keep making better phones, or it can make the same quality phones for less money. Low-cost manufacturers, particularly in high-wage areas, tend to lose their cost advantages over time, due to wage increases, plant obsolescence, etc. NOK is good at controlling costs, but there's only so much a company can do. And as customer purchases are going to depend on quality technology and competitive prices, any major slip could be fatal. A few years ago, MOT was one of the most admired companies in the world.

As for the current fashion for NOK -- well, fashion is incredibly fickle. Some hot new phone from Samsung and the kids will drop NOK like they dropped Sergio Valente. I wouldn't invest for the long run based on what kids today find cool.

As for valuation, NOK's market cap is bigger than most of its rivals combined, even though its sales are less and its business is much more concentrated in handsets (and therefore much more subject to volatility) than are those of major rivals. For NOK to grow strongly, growth in handsets (around 72% of the business) will have to be strong and margins will have to hold -- and the company will have to grow its smaller businesses at very high rates. IMO, this will be difficult to do.

All this means that I like NOK but I think it's probably valued too highly right now, given the huge uncertainties it faces. Can it achieve the kind of growth it needs to? Sure. How likely is that? Well -- it doesn't look terribly likely to me at the moment. Over time, in a highly competitive market like NOK's competitors tend to regress to the mean. This means, for example, that NOK's margins will tend to decline and MOT's margins will tend to improve. (If this weren't true, all industries would eventually become natural monopolies.) Now it's true that some companies utterly dominate their industries for decades, but most of the time extreme disparities close up.

I don't plan on selling NOK for now, though, because all of the above could turn out to be wrong. I am hedging my bets, though. I bought 1,000 shares of MOT a few days ago. I think MOT is a great company going through a bad time, and I think it's a more compelling valuation case than NOK at this point.

I would obviously be delighted to be contradicted on any of the above points, though. I'm really hoping I'm wrong.