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Online Extra: Nokia: Investors Should Dial "P" for Patience


A year ago, when Nokia Corp. was Europe's most valuable company, it appeared that investors might never again have a chance to buy the Finnish telecom powerhouse on the cheap. They do now: Nokia shares are trading at barely half their 12-month high of $62.50, the type of downshift that might be expected at beleaguered Motorola or Ericsson, both of which are getting thrashed in the global handset market. However, it's Nokia that's punishing the competition, gaining market share, and hogging nearly all the profits in the industry. So is it time to buy?

That depends on your time horizon. No doubt, while its competitors stuggle to distance themselves from the rough cell-phone market, Nokia leads a life of relative privilege. Moreover, it's planning to feast on its competitors by gobbling up global market share, ending this year at 40%, up seven points. The danger from an investor's view is that the Finns say they're ready to sacrifice profit margins to meet their market-share targets.

Already, Nokia has slashed prices by 20% to 25% on its top-of-the-line 8210 series. And its profit growth targets are made more vulnerable by the downturn in the wireless markets. This leads Per Lindberg of Dresdner, Kleinwort Wasserstein Research in London to predict "flat-to-negative" earnings growth through 2003. He rates Nokia a sell.

3G QUAGMIRE. One of Nokia's greatest strengths is also its biggest liability: The company is preparing itself technologically to make a killing on the mobile Internet -- but could languish if the high-speed so-called third generation of wireless fails to take off. Right now, investors are skeptical about 3G, which contributes to the sag in Nokia's stock. Indeed, those pricey networks are facing delays in Japan and Europe -- and are barely in the planning stage in America.

The company's entire business plan envisioned a quick romp into 3G -- and now it's turning into a slog. Merrill Lynch's Adnaan Ahmad predicts that a slack stock market and 3G blues will combine to push Nokia's operating margin down from 19% last year to 16.2% in 2001. Revenue growth, which reached 52% last year, should slow to 21%. This year's numbers would be spectacular for the slumping high-tech market, and head and shoulders above those of Nokia's battered competitors. But Nokia investors are accustomed to more. So Ahmad rates the stock a lukewarm accumulate.

The numbers tell why. Even though its stock has dropped, the company, which netted profits of $3.4 billion in 2000 on sales of $27.3 billion, still trades at a rich 32 price-to-earnings ratio. This makes the stock vulnerable to ugly surprises, any number of which could rock Nokia this year. Imagine, for instance, that a major phone company announces delays in the coming 3G wireless network. Already, industry leader NTT DoCoMo of Japan, has delayed its 3G rollout from this spring to next fall, citing technical glitches. If similar problems force big Nokia customers like Vodafone to push back 3G, a market that's uneasy about the wireless Internet will sell off Nokia.

DRYING UP. Another danger is slowing growth in the global handset market. This is Nokia's bread-and-butter, and the growth projections keep edging down. A year ago, when cell-phone unit sales were rising by 50% annually, it seemed a cinch that sales would reach 550 million in 2001. Trouble was, phone companies last year were buying a lot of customers by offering them subsidized phones. Suddenly anxious to make money, the phone companies are backing away from subsidies -- and the market is drying up. Nokia's current projection calls for a market of 475 million cell phones in 2001 -- 40% of them Nokia's. But if signs emerge that even that number is a stretch, its shares could be hammered.

Or assume for a moment that phone companies agree to pool resources. Staggering under massive debt, carriers in Europe -- Nokia's stronghold -- are looking for ways to cut costs as they build 3G networks. One solution, pending approval from regulators, is to share licences and split the network costs. This wouldn't hit Nokia nearly as hard as Ericsson. Network gear accounts for only 25% of Nokia's sales. What's more, if phone companies can cut costs, they'll likely invest more in the wireless Net, thus improving the odds that the new technology will take off. Still, to many investors 3G pooling would look suspiciously like 3G shrinkage -- and they'll sell.

If Nokia is a short-term risk, however, it could be a winner for patient investors. The long view, after all, is Nokia's forte. Indeed, it was forward thinking 10 years ago that led Nokia to plow money into design, branding, and manufacturing of mobile phones. This strategy, executed brilliantly, led a virtual unknown to global domination of the world's largest single electronics busines. This year, Nokia should produce 180 million phones -- a half million per day. And the company produces on a scale and with efficiency that its competitors can't match.

THE UPSIDE. The current gloom in wireless may hurt Nokia's earnings. But while battered competititors like Alcatel and Ericsson make for the exits, Nokia continues to expand. For long-term investors, here's Nokia's upside: It has a leading global brand, a team of managers that has led it through a tumultuous decade, more than 200 million customers, an industry-leading R&D budget of $3 billion, and dominance in the mobile handset market. If the Internet spreads into wireless, at least a good chunk of that data traffic will occur over mobile phones. Any other company that wants to climb to the top of that market -- be it Microsoft, Sony, or Matsushita -- will have to push past Nokia.

Unfortunately for investors, this isn't a second chance at 1992. People who put $2,000 into Nokia back then are millionaires now. Still, for a tech stock that has room to grow, Nokia isn't a bad bet. If you do buy, just remember to salt the shares away. Because the next 12 months could well be a wireless roller-coaster. By Stephen Baker in Paris


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