I couldn't have been the only one scratching my head over the weekend after noticing a giant Nokia (NYSE:NOK) N95 phone on the cover of Barron's. "A BETTER BET THAN APPLE," reads the all-caps headline.
"Nokia doesn't get nearly as much ink, but it will be the big winner as the world goes wireless," reads the cover-story teaser.
Pitting Apple (NASDAQ:AAPL) against Nokia is like egging on two buddies to fight one another. No, they're not allies, but they tend to draw from the same shareholder base. Go to Motley Fool CAPS, punch in Nokia's ticker symbol, and you'll find that folks who are bullish on the Finnish cell phone giant are also bullish on Apple.
Your fellow Fools aren't simply crooning power ballads to all the stocks in the wireless space. Those same Nokia bulls are also bearish on Motorola (NYSE:MOT) and BlackBerry maker Research In Motion (NASDAQ:RIMM). Even if the iPhone is a direct assault on Nokia, can't these two just get along?
Knocking on Nokia
Barron's argues that Nokia is ready to "take center stage" for several reasons:
- It commands 37% of the global handset market, gaining share at the expense of rivals like Motorola.
- Nokia trades at half the earnings multiple of Apple.
- The company is making a push to improve its stateside standing.
- Google (NASDAQ:GOOG) gPhone rumors suggest "how enviable Nokia's position is."
Let's tackle all four of those horsemen. Yes, Nokia is gaining market share, but a lot of that is simply Nokia taking back the share that Motorola wrestled away a few years ago when its slick Razr handsets were all the rage.
In fact, 37% is less than the 38% it commanded four years ago. You can also go back more than six years to find Nokia setting 2001 goals of 40% market share, with its CFO arguing that 50% was "not impossible" for the company.
I'm not trying to downplay Nokia's turnaround. It's for real. However, let's not assume this is virgin ground for Nokia. It's been here before. It tasted success. It let it get away. There are just too many players to assume otherwise.
The article then compares Nokia's 2007 P/E multiple of 17.5 (before Friday's close) to Apple's ratio of 37. However, Apple is the one growing faster. Looking ahead to 2008, Apple's bottom-line multiple is just 32 times, compared to Nokia's ratio of 17. And since we're introducing Wall Street estimates into the mix, I should point out that Nokia has narrowly missed analyst targets in two of the past five quarters. Apple has lapped the pros in 18 consecutive quarters.
This doesn't mean investors shouldn't load up their portfolios with shares of both companies. Nokia is a great value here. However, the thesis of Nokia clocking greater gains is blurry at best.
Handing it to handsets
The third horseman deals with Nokia's efforts to improve its presence in the United States. The irony here is that Apple has scheduled a press conference in London tomorrow, no doubt ready to squeeze out details of the iPhone growth strategy in Nokia's strong European market.
This also comes on the heels of Apple slashing its iPhone price by a third. Nokia makes some great, functional phones and smartphones, but companies like Apple and Research In Motion didn't get where they are by falling asleep at the evolutionary wheel the way Palm (NASDAQ:PALM) did. Apple's dominance on the iPod front has made non-iPod-friendly handsets a hard sell when it comes to digital music. In short, saying you want to grow in a competitive, creative, and cutthroat market is one thing. Achieving it with respectable margins is another.
Nokia is no stranger to such dips. It saw margins and profits dip in 2005, before bouncing back nicely last year. However, with iPhone prices coming down, it'll need good luck with any near-term markups.
Finally, let's touch on the gPhone speculation. It makes sense for a company like Google, which is trying hard to grab a thicker slice in mobile search, to offer partly subsidized hardware and Web access. No one can monetize local search the way Google does. But how would this benefit Nokia, exactly? That's like saying the entrance of Research In Motion and Nokia into the smartphone market vindicated Palm's pioneering spirit. No, cash-rich Google jumping into the mix would be a challenge for both handset makers and wireless service providers.
So let's cut to the chase, please. There is nothing wrong with Nokia's outlook as a market outperformer. I'm with Nokia bulls on that one. However, it's just pointless to compare the handset giant to Apple. Yes, Nokia offers the cheaper play on a valuation basis, but Apple's iPhone is selling briskly, even though it remains a tiny part of the Apple revenue mix that is dominated by Macs and iPods at the moment.
If you're going to stage a battle of the bands, at least make sure they're all in the same musical genre.
Some related tracks to keep you moving:
