December 28, 2011 | In: Technology

Is Nokia Overpriced?

I think I would like to start this article with this question: “When was the last time you saw someone with a Nokia phone?” Now let me be the first to answer it: “A few months ago…” If I had been asked this same question 5 years ago, I would have said “I carry one myself, as well as everyone else I know”. In these 5 years, and especially since the invention of the iPhone, Finnish Nokia, as a business, was in a downtrend.

Let us check NOK for the past 5 years:

Figure 1: Nokia (NYSE:NOK) for the pat 5 years (image courtesy of Google Finance)

As you can see from the above chart, NOK is trading at just over 10% of its peak back in 2007. What happened between now and then for the stock to go down like this? In my opinion, here’s what happened:

  • Nokia stopped becoming innovative: When was the last time you looked at a Nokia phone and you said Wow!
  • Nokia didn’t adopt the mainstream smartphone mentality: In fact, Nokia insisted on selling outdated and overpriced Symbian phones and tried to pass them as smartphones (that was the case until very recently when it started its alliance with Microsoft), while there was nothing really smart about them.

  • Nokia didn’t adopt Android: This is the same mistake that RIM has committed and that cost its business. Nokia stopped short from adopting the Android OS and is sticking to Symbian (here’s a comparison between Symbian and Android). It wasn’t until very late that Nokia has decided to ally with Microsoft and produce Windows phones, that probably suck even more than Symbian phones.

Now we know why Nokia is trading at just 10% of its peak back in 2007, but, we haven’t answered this question, is it overpriced even at the current price of $4.74? To know the answer to that, we have to take a glimpse at Nokia’s future by analyzing its current business:

  • Nokia’s main revenue comes from developing countries: Ever since Nokia’s demise in the developed world back in 2007, Nokia’s main revenue comes from selling cheap phones in developing markets. Will that be the case in 3 years from now when (Chinese) competitors will try to get a piece of this cake as well, and when developing markets will become more developed?
  • Nokia has allied with Microsoft in the smartphone business: I think Nokia took a wrong turn with this alliance. The market for Windows smartphones is not that big and it is shrinking every day (Android’s market is expanding at the expense of the Windows smartphones’ market, among other markets). Of course, Nokia released the Lumia 800 smartphone, but that phone is not cheap and, again, it doesn’t have Android.

  • Nokia is spending a lot of money on advertising: Nokia’s advertising expenses are on the rise to make up for the loss of market interest in its products. (By the way, Nokia received a $30 million of free money from Microsoft to advertise its Windows smartphones – although I think that money is now spent).

  • Nokia phones are uglier by the day: I remember that until the year 2007, Nokia used to always awe us with the beauty of its phones, this is no longer the case. Even the Lumia 800 is nothing special!

  • Nokia’s ovi store is one ugly store: Check store.ovi.com if you don’t believe me, compare that to the Android market or iTunes. Which one would you be more inclined to buy something from?

Now, after analyzing Nokia’s present, what will be its future? I don’t believe it’s going to be a bright future, in fact, Nokia has nothing special to offer anymore. Now Nokia is trading at a forward price to earnings ratio of 20.68, but will it exist 20 years from now? I don’t think so, will it still exist in 10 years from now, I still don’t think so. How about 5 years? Maybe, but if, and only if, these Windows smartphones gave it a temporary antidote. Which means that Nokia should not trade at anything over a P/E ratio of 5, which means that the current stock price should be $1.15 (which makes NOK a penny stock).

Nokia is dead, RIM is dead, the iPhone will die, long live Android! It’s probably not what everyone wants (including me) but the fact of the matter is Android is here to stay, and it was the best investment that Google made.

This article (as well as all other articles on this website) is an intellectual property and copyright of Fadi El-Eter and can only appear on fadi.el-eter.com.

1 Response to Is Nokia Overpriced?

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Worst Stocks to Buy in 2012 « Fadi El-Eter

January 2nd, 2012 at 4:56 pm

[...] its own phones (I’m talking about the $30 million or so it received from Microsoft). NOK is highly overpriced, even though it lost 53% in 2011. I think NOK will be halved in [...]

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