Has Nokia Run Out of Rocket Fuel?

The phonemaker's days of high-octane growth are in jeopardy

The light at the end of the tunnel keeps receding. Only days after mobile-phone giant Nokia Corp. (NOK ) announced it had met first-quarter targets but disappointed investors by scaling back its full-year sales growth estimates, rival Ericsson disclosed that it would likely lose money in 2002, despite massive layoffs. And it's not just European wireless giants that are suffering: North American stalwarts such as WorldCom (WCOM ), Lucent Technologies (LU ), and Nortel Networks (NT ) also are putting out grim numbers. The avalanche of bleak news has plunged telecom and telecom-equipment stocks to new lows.

Investors aren't surprised anymore by the travails of the industry's weakest players. What's spooking them now is the prospect that even a titan like Nokia can no longer escape gravity's pull. "The glory days are definitely over," says analyst Phil Kendall of researcher Strategy Analytics in Luton, England.

For Nokia's shareholders, the possibility that the stock may have peaked is chilling. Just 15 months ago, annual sales were still climbing at a 50% clip, capping off an amazing decade that saw revenues grow tenfold. Even during the 2001 downturn, Nokia managed to scoop up four points of market share, further tightening its grip on the mobile handset market. Now, the New Economy star has fallen back to earth. First-quarter sales and profits were both down 12% year-on-year--their steepest slide in more than a decade. Worse, analysts peg revenue growth this year at only 6% and say profits could actually fall.

Is the Nokia party over? "There's a real risk it is," says Mark A. Roberts, a managing director at Wachovia Securities Inc., who downgraded the stock on Apr. 18. While Nokia will likely remain the industry leader and keep churning out solid numbers, thanks to its tremendous operating efficiency, it's entering a lower growth phase that could put off some investors. Chairman and CEO Jorma Ollila concedes that the wireless market is slowing. But he insists that Nokia's future is full of opportunity: "This will continue to be an exciting growth industry for years to come."

Some of Nokia's problems are clearly temporary. The handset market--where the company gets three-quarters of its nearly $28 billion in revenues--has taken a whack from the global economy. After enjoying compound growth of 60% from 1996 to 2000, worldwide handset sales shrank for the first time last year and may climb only 5% in 2002. Blame it on saturation in the crucial European market, where penetration is already as high as 75%. Plus, customers don't seem as interested in trading up to newer models these days. One reason: Carriers have slashed subsidies on replacement phones.

But Nokia also is at the mercy of more enduring trends. Analysts figure handset sales will grow by about 15% annually for the next five years, even with the rollout of snazzy third-generation phones. That's boffo growth compared to mature industries such as TVs and PCs, but hardly the dizzying rates of the 1990s.

What's more, Nokia's market share, now approaching Ollila's long-stated goal of 40%, isn't likely to grow much beyond that level. Why? "Operators are keen not to let any handset maker become too dominant," explains analyst Andy Buss of British researcher Canalys. To keep Nokia in check, carriers may push phones from rival manufacturers--especially up-and-comer Samsung Electronics and a reinvigorated Motorola. Analysts also worry that this year's planned deluge of new Nokia models, targeted at ever-narrower market segments, could confuse customers. But Ollila believes that consumers will continue to gravitate to the Nokia brand--even more so as subsidies abate.

As rough as things may be for Nokia this year, most rivals would love to have its problems. Even though the Finnish company's stock has fallen 74% from its peak in June, 2000, that's better performance than most other telecoms. And with a price-to-earnings ratio of 40, Nokia still commands the respect of investors, who expect superior results. So far, the company has delivered. But if Nokia's glory days are indeed behind it, that enthusiasm could fade fast.

By Andy Reinhardt in Paris

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