Will Nokia Follow in the Footsteps of Motorola?
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Nokia's stock price tumbled down during the year and sank to a near all-time low. This was due to the company’s struggles to stay afloat. Does the current low price of the stock suggest it is game over for the former leader of mobile companies? I think there isn't much Nokia (NYSE: NOK) can do as the company's market share further shrinks and its debts accumulate; perhaps the only course left is to sell off the company along with its intellectual property for the highest bidder. Let's explore this idea and the company’s status.
The decline in Nokia's stock price isn’t something new: in 2010 the stock's price decreased by 15.9%, in 2011, by 50.4%; in 2012, by 63%.
The change in the company's financial situation from profits to losses in recent years reflects the decline in the company's market share in the cell phones industry: During 2010 the company's operational profitability was 4.7%, but in 2011 the company’s profitability turned red with a $1.4 billion loss.
This year so far the company's losses continue to accumulate: during Q2 the operational loss was €327 million; the net sales declined by 19% compared to the net sales in Q2 2011.
The revolution that Apple (NASDAQ: AAPL) started in the Smart-phone industry with its i-phone crowded out many cell phone manufacturers such as Nokia and Motorola.
Nokia put up a fight and tried to penetrate this market with little success: The company has been collaborating with Microsoft (NASDAQ: MSFT) in Nokia's version of a Smart-phone with Windows 7 for Mobile, alas this product didn't succeed in North America as it only reached a market share of 1.3% of all users. This low market share doesn't project well for the release of Windows 8 for Mobile.
Nokia also tried to stay afloat by entering the Asian markets including the Chinese market and providing low cost cell phones. But since these markets offer low profit margins and high competition it isn't enough for keep Nokia from drowning.
The economic slowdown is also a factor adversely affecting not only Nokia but many other consumer product companies.
The S&P500 could serve as an adequate assessment for the progress of the U.S economy; the index didn't perform well in recent years. The correlation between Nokia and S&P500 isn't high and reached 0.38 (during 2012). This means that the movement of the S&P500 could explain at best 14.8% of the volatility of Nokia's stock (under certain assumptions). Therefore, the slow growth of the U.S economy isn’t helping Nokia but at the same time isn’t the main factor for Nokia’s decline.
The chart shows the developments of Nokia and S&P500 during the past couple of years.
As I see it, perhaps the only way out for Nokia is to offer its patents for sale. This won't be the first “garage sale” of a mobile company: Google (NASDAQ: GOOG) purchased Motorola Mobility Holdings Inc for $12.4 billion; Google admitted that nearly half of the purchase price was for Motorola's patents and technology.
This idea of selling patents is something that Nokia’s management has already been considering in order to payoff the company’s losses. After all, Nokia is the leading company in number of Mobile patents; Nokia has over 30,000 patents and nearly 10,000 patented innovations.
The recent collaboration between Nokia and Microsoft puts the latter in a position to be the leading company to consider buying Nokia in an attempt to become a contender in the Mobile industry.
In the short term, I think Nokia might consider selling some of its patents and innovations but not the whole nine yards. The market price of Nokia reflects little confidence in the company's ability to bounce back from its current slump. Nonetheless, I think if the right offer will come from Microsoft or another deep pocket company, this could lead Nokia to sell the entire operation for its intellectual property and thus follow in the footsteps of Motorola Mobility Holdings.
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Disclaimer: The author holds no positions in stocks mentioned and does not plan to initiate positions within 120 hours of the posting of this article. This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact.
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