At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
And speaking of the worst ...
In an abbreviated trading week, shares of Nokia (NOK 1.55%) gained a staggering 28.5%. And if that move got you wondering what's up with Nokia, well, you're not alone. Turns out the surge in buying over at Finland's Nokia caught the eye of bankers in Denmark on Friday. And taking a closer look at the situation, wouldn't you know it -- the folks at Danske Bank think investors just might be onto something.
According to Danske, there's good reason for the surge in interest at Nokia. The company's new Lumia 920 line of smartphones, based on the Microsoft (MSFT 1.40%) Windows 8 operating system, is selling like hotcakes. From Australia to Germany to the United States, the phone is selling out around the globe -- partially because Nokia didn't ship a lot of them initially, Danske says, but also because of "the quality of the device."
That's good news for Nokia, in Danske's view. As quoted on StreetInsider.com, the analyst opines that if consumers remain enthused about the Lumia's capabilities, the company should be able to scale up manufacturing rapidly to meet the demand. This has Danske thinking that Nokia could sell half again as many Lumias as it initially estimated for 2013 -- perhaps as many as 36 million units. And with the profits that come with so many sales, Danske now estimates Nokia shares will soon be worth as much as $3.75 per share.
The bad news about good news
Sound good to you? If you bought the stock as recently as last Friday, when it was selling for only $2.77 a share, it is good news -- about 35-percentage-points'-worth-of-profit good. On the other hand, though, after Nokia's recent run-up, a move from yesterday's closing share price of $3.56 to Danske's posited $3.75 amounts to only about a 5% profit.
Five measly percentage points? Buying a share of Nokia hardly seems worth the trouble if that's all we can expect. But wait -- before you turn up your nose at Danske's paltry prediction for share price, remember that Nokia also pays its shareholders a dividend, currently yielding 7.9%. Put that together with the potential for capital gains, and you're looking at potential profit close to 13% -- a much more respectable number, especially when you consider that even if the share-price gain fails to materialize, the dividend probably will.
Valuation matters
But speaking of share price, how realistic is that $3.75 price target, anyway? I mean, as recently as July, Nokia shares were selling for just $1.69 apiece. Has the company really improved enough in just five short months for its shares to be worth more than twice what they fetched in July?
Actually ... maybe ... yes. Sure, Danske's prediction of 36 million Lumia sales in 2013 doesn't sound like much. Heck, Apple (AAPL +0.11%) sold nearly that many iPhones in a single quarter of this year (and a boatload of iPads besides). On the other hand, assuming it hits the number, 36 million Lumias would be more smartphones than any of Sony (SNE 2.48%), LG, or Motorola (now owned by Google (GOOG 3.45%)) sold last year. Relatively speaking, it's not a small number.
As for whether this number justifies the stock price, well consider:
- Leaving feature phones aside, in 2009, Nokia sold 67.7 million smartphones, or only twice the number of Lumias it's expected to move next year. Nokia ended 2009 at a share price of $16 -- four times the market cap.
- In 2010, Nokia moved 100.3 smartphone units -- 2.8 times the projected 2013 number -- and ended the year at about $10.50 a share, or precisely 2.8 times Danske's price target.
- And most recently, in 2011, Nokia's smartphone shipments dropped to 77.3 million, or just over twice 2013's estimate, with the shares dropping to $5.24 in response -- 1.4 times Danske's price target.
Foolish takeaway
What can we glean from these numbers? Three things, I think. First, strong smartphone sales by Nokia in 2013 could result in a stock price that rises much faster than unit sales growth ... or roughly in proportion to that growth ... or less. It's hard to say.
Second, it does appear that investors are more willing to give Nokia a big market cap going into a year when Nokia's smartphone production is growing (like 2010 ... or 2013), than in years when it appears to be shrinking (like 2011 or 2012). So that's good news.
Third, and finally, although knocked down in 2012, Nokia is not yet out. It remains a competitor to contend with in cell phones generally, and smartphones in particular. It has significant production capacity, and Danske's probably right about the company's ability to scale up manufacturing to meet demand, if the Lumia 920 proves a hit.
Now, does all this mean you should follow Danske's advice and buy the stock? I'm not sure it does. Although I own Nokia myself, I'm leery of buying more shares of a company that's currently unprofitable and burning through $965 million in negative free cash flow annually. Before doubling down on Nokia, I'll want to see the company return to free cash flow profitability.
And if that means waiting a year and giving up a 5% gain in stock price -- so be it.
