Now Is Not The Time To Sell Nokia

By Maxwell Fisher - August 29, 2012 | Tickers: AAPL, GOOG, MSFT, NOK | 0 Comments

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For many investors the idea of taking a risk on a stock that has plummeted in value by nearly 50 percent in just 5 months does not seem appealing. In fact, many companies who experience such a drop may be on the verge of going belly up, a prediction that many experts have levied against the one time great cell phone manufacturer, Nokia (NYSE: NOK). 

These experts are not without good reason to foster such a belief. With Nokia reporting a 39 percent drop in U.S. sales from 2011 numbers, it can be easy to drink the pessimism cool-aide that is being handed out.

But, as with many companies, there comes a time when the company needs to focus its efforts and cut expenses so it can survive a difficult transition mode. For Nokia, that time is now time is now. With recent cuts to expenses, narrowing its focus on the phones being offered, and strong international numbers; I believe that Nokia’s share price has bottomed out. With an investment in Nokia at its current discounted price, investors could see a substantial dividend payoff in 2013.

A slight increase in revenue

With a company teetering on the brink of failure, any increase in revenue may be enough to convince some investors to back away from the edge of the cliff.  With second quarter gross revenue reportedly rising to $9.41 billion, a slight rise from the $9.28 billion in revenue it reported for the first quarter, this could provide the news that many have long waited for, that Nokia is finally climbing out of the deep hole it has dug for itself.

The elimination of Symbia

Nokia has begun its refocused approach in attempting to capture its one-time 40 percent global market share, which has reportedly dropped by 20 percent.  In order to achieve some of its previous profitability, it has turned its focus on competing with smartphone producers Apple (NASDAQ: AAPL) and Google’s (NASDAQ: GOOG) with its production of the Windows 8 phone, which is being produced in partnership with Microsoft (MSFT). 

Although the release of the new phone is not scheduled until September, Microsoft and Nokia have, in the interim, effectively marketed its Lumina cell phone, a phone that has shown strong profitability when it reportedly sold 4 million units in the second quarter of 2012. 

Nokia has the cash reserves to survive

Beyond the promise of its new cell phone line, Nokia also reported better than expected cash reserves. Despite Nokia’s $1 billion loss for the second quarter of 2012, Nokia still has cash reserves of $5.2 billion.  This safety net, even with the significant and projected future losses, should allow Nokia to stay afloat until it begins to capitalize on its Windows 8 phones in both the U.S. and foreign markets.  This in my opinion provides an adequate safety net for investors to stick with their investment even if third quarter numbers provide further reason to believe that Nokia cannot return to profitability.

Along with the surprise cash reserves, Nokia has also trimmed down expenses substantially.  It has been reported that since 2011, Nokia has laid off 24,000 employees, a difficult but necessary move for Nokia to be able to regain its focus.       

Dominance in undervalued markets

Although Nokia is struggling in the U.S. and across large portions of the world in its efforts to compete with Google’s reported 68.1 percent global market share and Apple’s 16.9 percent global market share, there are areas that Nokia has capitalized and should be able to continue to capitalize on in undervalued markets that have recently reported a rapid increase in cell phone sales. If Nokia is able to further its foothold in these markets, this will allow it to make substantial gains on its current 4.4 percent global market share.   

Indonesia, where Nokia is a major player, reported that cell phone sales doubled in the first half of 2012 as compared to 2011 with $676.5 million in sales revenue.  Analysts have predicted that Indonesia will continue to see growth for the remainder of the year, as a large number of retail stores and distribution centers will continue to be built.  As a result of the sales figures, Nokia saws its net profit jump to $22.4, million and increase of 217 percent from 2011 numbers.

Nokia still continues to dominate in other markets as well, such as South Africa, which reported that Nokia holds a 51 percent market share.  The large reason for Nokia’s popularity is that its phones are priced in a way the appeals to many young South African consumers.  As a result, Apple and Google have only been able to muster sales of 400,000 and 800,000, respectively. 

All $3 stocks contain some risk. But Nokia has proven that it can be profitable in the past and thus, has shown some signs of regaining this form by the end of the year. The investment will not be without its bumps, but with its new smartphone releases, its cash reserves and its strong appeal to global markets, Nokia may have just what it takes to pay investors handsomely for their faith in the Nokia brand.

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