Nokia - Is this $2 Stock Finally out of Gas?
cris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It looks like Nokia (NYSE: NOK) just can't catch a break. The embattled telecom company has seen an avalanche of bad news and bad decisions the last few years, and it's shown in its stock price. While it nearly hit $40 as recently as late 2007, it's been downhill ever since. Currently, the stock is trading in the $2 range.
While some believe there is hope for the company, I think any investment in Nokia would be a waste of time for the near future. Most recently, the company received bad news from Microsoft (NASDAQ: MSFT), Moody's, and even the Finnish government. Based off the bad news, as well as pessimism from investors, I would stay far, far away from Nokia at this time.
Struggling to stay afloat, Nokia had previously hoped its fortunes could be saved by Microsoft's Windows 8. However, these hopes were crushed, as Microsoft announced older phones (mostly Nokia's) that had Windows software would not be able to upgrade to the new Windows 8. This is a huge blow to the embattled telecom company, as some had been hoping Windows 8 could be the savior of Nokia. While Nokia will still produce new phones that run Windows 8, the old phones will no longer work. And for a company struggling as bad as Nokia is, the news hits harder than it would most. And on top of that, Nokia is faced with the daunting task of not only trying to sell its own phones, but trying to sell people on the idea of Windows 8 itself, as Nokia CEO Stephen Elop told the Wall Street Journal. Nokia is the largest producer of Windows phones, and while many companies would be thrilled to be tied to Microsoft, it hasn't worked out so well for Nokia. Financial analyst Nick Dillon is skeptical of the future of Nokia.
"We do expect that level of familiarity will bring some uplift to Windows Phone, and so too for Nokia as the most heavily invested smartphone maker," Dillon said. "But it is going to be the end of the year before we see Windows 8 rolling out in any meaningful way. Then you have to wait for people to upgrade, and that is pushing into 2013, which is just the time that Nokia is going to be running out of time."
Since being one of the biggest telecom companies in the country 10 years ago, Nokia has had a precipitous fall. Experts cite numerous reasons for this, including choosing not to buy into the idea of flip-phones, ceding a lot of sales to Motorola Solutions (MSI), maker of the popular Razr phones. It also lost much of the U.S. market to privately held Samsung Electronics and LG Electronics. Of course, like many companies, it became dwarfed in sales by Apple's (AAPL) iPhone. And when Google (GOOG) rolled out Android, it was all she wrote for Nokia. Currently, one of the only companies Nokia is beating in revenue terms is Ericsson (NASDAQ: ERIC), which made many of same wrong decisions Nokia made. Still, Ericsson trades for almost 5 times what Nokia does, as well as having a market cap of almost four times Nokia ($30 billion to Nokia's less than $8 billion).
The upshot? Dark times for Nokia investors. After Microsoft announced its plans, financial analysts reduced the expected sales of Nokia phones by a pretty big margin. Nomura Holdings believes the company will now sell 41 percent fewer Windows Phone devices than before, with revenues almost cut in half. Analysts have a mean target price of just over $3, but I doubt Nokia will have enough movement this year to get to that point.
Not to keep piling on, but I'm going to keep piling on. The Finnish government recently announced it would not be bailing out Nokia by buying some of its shares. While Nokia has historically been a big part of Finland's economy, the government decided non-intervention was the best strategy. So, while many Nokia investors were hoping for a Finnish life raft, those hopes were -- once again -- all for naught.
Considering all of this, it is no surprise that Moody's decided to downgrade Nokia once again, declaring its debt "junk." This marked the second time in just two months that the debt-rating agency decided to bite its thumb at the struggling telecom company. One of the reasons for the downgrade was a plan by Nokia to restructure its staff, cutting 10,000 jobs. The company warned its earnings would once again be lower than expected, and cut jobs accordingly to make up for significant profit losses.
Really, the only reason to have any shred of optimism left about Nokia is the fact that it is still the owner of a pretty decent patent portfolio. The company owns a whopping 30,000 patents, a trove that one analyst calls "one of the best in the industry," and another believes the patents could even be worth more than the company's current market value. This is due to a concerted effort on the part of Nokia to devote a significant amount of money into research and development, one of the few good moves the company has made recently. So at the very least, the company can fall back on its huge supply of technology patents, making it potentially a target for another company to buy, possibly Microsoft. As patent newsletter editor Greg Aharonian told Technology Review, "Nokia will still die, but at least it can die serenely inside Microsoft."
One could argue Nokia made the wrong move by putting all of its eggs in the Windows Phone basket in the first place. With Microsoft's announcement that anyone who previously purchased a Windows Phone would not be able to upgrade, that sent a significant blow to Nokia. That, combined with Finland's decision not to bail out Nokia, as well as the Moody's downgrade, makes Nokia a company I would stay away from for the foreseeable future. While its patents are one bright spot, I think it just makes it slightly more of a target to be bought out, as it looks like there's little left for the company to do on its own. Things can always change, but I would urge investors to hold off on buying Nokia for now.
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