Nokia's Sales Miss Leaves Doubts About Its Immunity in Mobile-Phone Market

It turns out that Nokia (NOK) is vulnerable, too.

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Long held up as the paragon of the mobile-phone handset industry, Finland-based Nokia said Tuesday that it sold 128 million phones during 2000, less than the 130 million to 140 million it had projected. Shares of the company were recently down $5.13, or 12%, to $38. They're 39% off their 52-week high of $62.50.

Philip Taylor, senior analyst with Yankee Group, says the news signals "the beginning of the end of Nokia's total domination of the global phone market."

Though the numbers hardly foretell Nokia's demise, and the company will retain its lead in the handset game in the near term, it's no longer a sure thing Nokia will continue as the clear-cut winner over the long term. For investors, this means there's no longer an easy choice in the wireless-equipment market.

In the third quarter, Nokia was far and away the market leader, with a 30.6% worldwide share, according to research firm Gartner Dataquest. Well behind were No. 2 Motorola (MOT), based in Schaumburg, Ill., at 13.3% and Ericsson (ERICY) of Sweden at 9.7%.

Sustainable?

The latest numbers from Nokia indicate that it increased its market share to 31.6% for the year.

But Taylor says: "I would expect that Nokia will find it increasingly difficult to maintain its market share going forward. It's not sustainable in the long term."

More competition is the main culprit, with the fight so harsh that some manufacturers are losing money or barely posting profits. Nokia has been the exception to that rule, boasting profit margins in the high teens on a percentage basis while Motorola struggles in the single digits and Ericsson loses money.

Some competition is coming from the Asian phone makers -- such as Japan's Sony (SNE) and Matsushita (maker of the Panasonic brand) and Korea's Samsung -- which "have a fairly strong hold on certain markets" in Asia, according to Taylor. Panasonic had a 5.4% worldwide share at the end of the third quarter.

In order to increase profitability, there's talk of different manufacturers merging their handset units, giving them the ability to take advantage of economies of scale. Usually, the talk has revolved around smaller players, but there's been mention of Ericsson, and even Nokia, seeking out an alliance of some sort with a Japanese player.

Broader Implications

Meanwhile, Nokia's problems are more a concern for Motorola and Ericsson, Taylor observes. Motorola and Ericsson's woes are both well documented. In fact, just last month Motorola warned of an earnings and revenue shortfall for the 2000 fourth quarter and the 2001 first quarter, as well as full-year 2001. It is scheduled to announce fourth-quarter earnings on Wednesday after the close of regular trading.

Of course, before Tuesday even Nokia hadn't been completely immune to worries over expanding competition and a slowdown in demand for cell phones. Last July, it issued a third-quarter earnings warning, blaming the timing of the introduction of new products and seasonal issues. But for the most part, it has been the shining star of the handset industry, underscored by its bullish projections for the next two years.

And the stock still has fans. "Clearly the risk has increased, particularly with the current economic situation," Merrill Lynch analyst Adnaan Ahmad writes in a report. "However, we believe that Nokia's superior supply chain management and its ability to reach the end market will keep it ahead of its peers." Ahmad, whose firm hasn't done underwriting for the company, advises using the stock's volatility as a buying opportunity.

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