Nokia Looks Good Either Way
Joel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
For the last few quarters, Nokia (NYSE: NOK) has been performing poorly owing to the sharp decline in popularity of their Symbian models, as well as the less than adequate sales figures of their Lumia smartphones running Microsoft’s (NASDAQ: MSFT) Windows operating system. The company has seen constantly shrinking sales volume in the US and optimism seems quite far fetched as of now, though Microsoft is planning to come up with better online publicity.
One might say that Nokia looks doomed; I definitely would not say so. I think this is simply a business re-engineering strategy that was long overdue. However, the company should have planned for it earlier and not have waited for so long.
With newer offerings coming in from strong competitors such as Samsung and Apple (NASDAQ: AAPL), Nokia’s sales were destined to drop. Nokia has always remained a very strong brand in the Asian markets like China and India. But competition from both local players and international players in these regions is giving the company a run for its money.
Further aggravating the situation is the striking turnover rate at the top managerial level. Most might take it as an indication of a sinking ship. All of these steps have, therefore, led to Nokia’s stock plunging with each passing day. Currently, the market value stands relegated to only $1.71, down from $7.31 in late October last year. This is the all time low for Nokia since 1996.
On 18 June, 2012 Moody's downgraded Nokia to junk status. Nokia CEO admitted on 28 June that the company's inability to foresee rapid changes in the mobile phone industry was one of the major reasons for the problems the company faced.
To make matters worse, Nokia’s losses widened to 1.4 billion euros as compared to last year‘s 368 million. The company’s market capitalization, which was more than 300 billion euros in the year 2000, has tumbled more than 90 percent since then, valuing it at 6.8 billion euros ($8.6 billion) as of 21 July.
So what action is Nokia taking?
Nokia is trying to right itself. The company has recently taken some drastic steps, such as huge layoffs in China and reducing the number of production units in Finland to just one. Some might think this is similar to a desperate move by a business struggling to stay afloat. Nokia has announced around 4,000 layoffs at smartphone manufacturing plants in Europe by the end of 2012 to move assembly closer to component suppliers in Asia.
Nokia’s production unit at Vertu was causing a lot of cash burn, and the company is finally selling it off to EQT Corporation. Furthermore, it is also planning to sell off the Nokia – Siemens networks to ensure independence of its operations. This would lead to Nokia reducing its corporate size to just half of what it was, though it would cost considerably less to maintain.
But despite this, there have been a few problems…
The lack of popularity of Windows phones has led Microsoft to rethink its tie up with Nokia and as of now seems to be showing little interest in their partnership. However, Microsoft does realize that it has to enter the mobile segment to keep itself alive in the age of the decaying PC industry. But while Nokia may not be a bad platform to start from, it isn’t the only one. Nokia, being heavily dependent on Microsoft, now finds itself in a rather sticky situation.
So, what would all these lead to?
The mammoth restructuring strategy would definitely make the company look much smaller and unattractive. However, the restructuring would lead to a smaller, more agile company, which would be able to concentrate better on its core competencies.
And what if things dont work out?
Well, worse comes to worse, Nokia‘s stock would crash even further. But in that case the company would become a potential takeover target for other technology players. This would most probably be good for investors.
On the other hand if the company manages to solve its problems and perform better, then this again would have a positive effect on the stock price.
So, in either case, Nokia seems like a good bet, but not without risk. Holding on to the stock and waiting would be a good idea rather than putting in more cash.
rahelg has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Microsoft. Motley Fool newsletter services recommend Apple, Microsoft, and Nokia. 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.