Facephone Could Make or Break Nokia
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
While Nokia (NYSE: NOK) has plenty of room for growth and improvement in its business model, I am currently staying clear of investing in its stock. Although I do not necessarily believe Nokia is going to go bankrupt in the near future, I am not confident enough in the direction of the company to invest.
Nokia stock is currently very close to its 52-week low, at around $2.75 per share. While this would suggest there is some room for growth and an increase in stock price as the economy continues to recover, I, along with other analysts, just do not trust the fundmentals of Nokia enough to purchase this stock. Nokia stock has endured a drop of over 90 percent in share price in the past five years, mostly stemming from the financial crisis and the restructuring of the company.
While Nokia is hardly the only company who has seen massive decreases in stock price since 2008, the majority of companies have seen some sort of bounce back in stock price. Even with a restructuring of the company to fix what was clearly broken, Nokia stock has been stuck under $10 for over a year. This is a warning sign to me, and it helps me understand Bank of America's (BAC)"underperform" rating on the shares.
With current cash reserves near $6 billion, and after reducing its cash balance by almost $3 billion in the past five quarters, simple math can lead one to believe Nokia may go bankrupt if something does not change. Furthermore, it is becoming more likely that Nokia may default on its loans in the next couple of years - some analysts say there is as high as a 49 percent chance of this. All of these factors continue to lead me to the conclusion that the smart move is to keep clear of Nokia until the company shows some signs of vitality.
Nokia, until recently, was the largest manufacturer of mobile phones in the world. Samsung overtook Nokia for the position of premier mobile phone producer in the first quarter of 2012, and all of Nokia's attempts to capitalize on the smartphone market have failed. However, none of this begins to suggest management is incapable of taking the proper measures to turn the company around.
Nokia has recently received support from Microsoft (NASDAQ: MSFT), and is planning to use Microsoft's Windows Phone operating system for its newest Lumia smartphone models. As part of the agreement, Microsoft will be paying Nokia a large sum for its contributions, but hopes to regain the money through royalties. This agreement is indisputably a good one by Nokia management, as it should help them provide a better smartphone product, and therefore bring in more revenue. This excess cash flow will be necessary for Nokia, if they want to keep paying dividends and refrain from going bankrupt.
However, for this agreement between Microsoft and Nokia to bring in that extra revenue, it must improve their product enough to make it competitive with, if not more successful than, the other top smartphone products currently available. Microsoft and Nokia will do everything in their power to gain in the global smartphone market share, most notably China. Nokia already holds the highest market share in China. There may be room to gain even a higher market share in China and other Asian markets, because Apple (NASDAQ: AAPL) iPhone, regarded as one of the best smartphones available, has not been able to capitalize on these growing markets.
I personally do not believe the Nokia-Microsoft smartphone will eclipse the iPhone, or any of the smartphones with the Android Operating System. There is too much successful competition in the smartphone market, and I think it is only a matter of time before Android phones and iPhones gain popularity in international markets.
Another cause that may hurt the Nokia smartphone is Google's (NASDAQ: GOOG) claims of antitrust violation against Nokia and Microsoft. Google claims Microsoft and Nokia transferred around 2,000 patents, all necessary for making smartphones, to Mosaid Technologies, so they could engage litigation suits against Google. While no lawsuits from Mosaid have begun, if Google was found violating the patents, it may be forced to pay royalties, significantly increasing the costs for Android phones.
With an increase in the costs for Android phones, comes an increase in their price, which will help Nokia take away some of Google's competitive advantage. Google's claims, that Nokia and Microsoft are using intellectual property rights as a method of spoiling rivalry, highlights this point. If Nokia and Microsoft are found guilty of antitrust violation, the companies will be penalized. This could drastically hurt Nokia, as it is already a struggling company while Microsoft will be largely unaffected.
How this Microsoft-Nokia relationship and the battle with Google will play out is unclear. With that said, none of the potential solutions makes me want to invest in Nokia. As equal of a worry to me is the rumor that Facebook (NASDAQ: FB) may purchase Nokia. This could be good or bad for Nokia, as Facebook would not be solely responsible for its future; whether it is bankrupt and defaults or for the production of smartphones moving forward.
Alongside this rumor is the idea that Facebook will use the Nokia-Microsoft partnership to create its own smartphone, dubbed the "Facephone." While this could be a successful business maneuver, I believe it is more likely that the "Facephone" would not live up to the level of Android phones or the iPhone. Furthermore, I believe Nokia would be swallowed up and risk losing its identity as a separate entity.
Although Nokia does have some prospects lined up for future growth, between its partnership with Microsoft, and the prospects of being purchased by Facebook, I find the likely outcomes of either of the situations troubling. Not only do I not like the direction Nokia is headed as company, but I also believe the inability of Nokia stock to increase substantially in the recent past may signal what is to come in the future for investors. For all of these reasons, I cannot recommend the purchase of Nokia stock now or until any news changes its current outlook.
StockCroc1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Facebook, Google, and Microsoft. Motley Fool newsletter services recommend Apple, Google, 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.