nokia lumia sales problems BAML

Nokia has big hopes for its new phones, including the Lumia 920. Bank of America Merrill Lynch (BAML) analysts are out with a report today on the popularity of the new phone and Nokia’s challenges in general. They believe that the initial uptake of Nokia’s new range of Windows Phone 8 has been good, with their multiple sources reporting that the Lumia 920 has sold out in the US, Germany, Finland and the UAE.  However, while this news look promising, this could be due to stock-outs due to supply constraints rather than being demand-led.

During the launch of the Lumia 800 in 4Q11, the media similarly reported that the phone had sold out. However, Nokia only shipped c1m units at that time. Consensus expects Nokia to ship 5.4mn Windows Phones in 4Q12, ramping to 33.2mn for 2013. This would equate to Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) gaining a c55-60% market share of WP, despite strong competing WP products from Samsung Electronics Co., Ltd. (LON:BC94), HTC Corp (TPE:2498), Huawei Technology Co Ltd (SHE:002502) and ZTE Corporation (SHE:000063).
Structural challenges remain daunting

BAML believes that the structural challenges facing Nokia remain daunting. Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V)’s reducing scale (it is no longer the largest handset vendor), lack of ecosystem (it is reliant on the new WP OS gaining momentum), lack of vertical integration (it has outsourced most of its handset supply chain) and lack of differentiation (other WP8 handsets have a very similar look and feel) lead them to believe that Nokia has no competitive edge. Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) also needs the broader Win 8 platform to take off.

Low Lumia interest in key mkts; Asha potentially tailing off

Analysis of Google Trends data suggests that overall interest in the Lumia models has picked up, driven by India/Russia while interest in the key US, W-E and China markets seems muted. As such,  they believe that 2013 consensus for Lumia ASPs of €167 may be too optimistic given the potential low-end, Emerging market-driven mix.

Additionally Google Trends data suggest interest in the Asha product line may be weakening, potentially hurting margins, given the positive contribution of this range vs the loss making nature of the Lumia range.

Supply chain unlikely may not allow volume upside

The analysts are concerned that Nokia may have difficulty ramping production to meet any demand upside given its reliance on third parties for key components (display, battery, memory, camera, mechanical). These may have already allocated incremental production capacity to higher volume competing products ramping at present (Samsung Galaxy S3, Note 2, iPhone 5, iPad 4 & mini).

Fundamentals remain weak

They expect Nokia to continue to burn cash and the net cash position to decrease to €2.7bn at end of Q4 (down from €3.6bn at end of Q3). BAML projects that Nokia’s phone division will be unprofitable next year (-2.7% operating margin), below consensus expectations of break-even (+0.3% operating margin), as  that this will be enough to offset the structural decline in feature phone revenues. BAML reiterates its underperform rating and sum of parts-derived €1.60 price target.

Disclosure: No position