Playing the Third Smartphone OS: Nokia or Research in Motion Limited?
Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In the smartphone wars, it is not clear if there will be a third operating system to stand next to Android and iOS, either in the consumer space or in the enterprise space. Nokia Corporation (NYSE: NOK) and Research in Motion Limited (NASDAQ: BBRY) are the two flagship plays for the third OS, with the former running Microsoft Corporations's (NASDAQ: MSFT) Windows Phone 8. Microsoft worked closely with Nokia for the phone release.
Research in Motion announced second quarter losses of 27 cents per share, beating analyst expectations of 47 cents per share losses. Shares vaulted in after-hours trading and were up 12 percent in the morning hours at around $8 a share. The stock had hit its 52-week low of $6.22 on Monday. As we noted previously, a number of hedge fund managers are interested in the company, particularly Prem Watsa of Fairfax Financial Holdings and billionaire Jim Simons of Renaissance Technologies.
Nokia stock has also been a roller coaster as of late and is down 46 percent this year, similar to RIMM's decrease of 45 percent year-to-date. With these huge decreases in price, betting on the third-place horse in this race is, though risky, quite inexpensive. Nokia trades at 0.8 times book, while Research in Motion trades at an even lower 0.4 times book. It remains to be seen whether these companies are value plays or value traps; despite optimistic product launches and earnings reports, these companies are both still burning money.
In the case of both companies, many have been particularly concerned about the worst-case scenario, thereby looking for patent valuations and total free cash. Microsoft is providing Nokia with “platform support payments” in order to make a good first impression with its new, all-important OS. Nokia noted earlier this year that it was to receive $250 million in quarterly payments from Microsoft to ease its transition for Symbian (Nokia's old OS) to Windows Phone 8. Despite this, the phone maker is anticipated to suspend its dividend in the face of low free cash flow. Nokia is estimated to be burning about $300 million in cash per month.
Nokia announced on Thursday that it is accepting pre-orders in Europe and Russia for its Lumia 920 smartphone, which it unveiled earlier this month. Compared to Research in Motion, Nokia does have a first-to-market advantage as an alternative in the enterprise space and, furthermore, stands to benefit from a positive launch of the cross-platform Windows 8. But there are still skeptics. Tim Long, an analyst at BMO Capital, thinks that the Lumia launch will flop and that, furthermore, the feature phone market will contract by 15 percent over the next year. His price target for Nokia shares is $2, compared to about $2.60 presently. As we have reported recently, however, this does not take into account the basic phone segment, which is key for the Asian cell phone market.
Research in Motion's Blackberries were favorites among businesses in the mid-2000s due to their “push email” service and their data encryption security software (RIMM was initially a data security firm). Nokia was a go-to for both basic phones at the turn of the millennium and saw brief popularity in the mid-2000s. These two makers fundamentally failed to take part in the switch from “feature phones” to the now ubiquitous smartphones, and now is the time of reckoning.
Research in Motion reported on Wednesday that it added 2 million customers, giving them a total of 80 million subscribers. Many analysts were expecting around a 500,000 subscription loss. Wells Fargo equities managing director Jennifer Fritzsche voiced concerns that this increase likely came at a cost. Phones were probably sold at a discount, and she points to unfavorable product mix as an unfortunate side effect. Additionally, she wants cash burn to become part of the conversation, estimating that RIMM is burning about $500 million per quarter. However, the company increased its total cash by $100 million to $2.3 billion total in cash. With plenty of money to get Research in Motion well through the Blackberry 10 product launch, this major upgrade, which is anticipated to occur the first quarter 2013, will be a critical moment in the company's history.
In all, investments in Nokia and Research in Motion amount to speculation on the rise of a third platform in a fiercely competitive space. Though we think the consumer space is essentially unswayable, we look to the enterprise market for better results from Nokia or Research in Motion.
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This article is written by Brian Tracz and edited by Meena Krishnamsetty. They have a long position in MSFT. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.