Will This Sinking Ship Survive?

Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

If investors are looking for a company to speculate on, then I suppose Nokia (NYSE: NOK), is as good a pick as any. Personally, I'd rather take my money to Vegas, throw it on black, and cross my fingers. Since the early 2000's the company has made a series of poor decisions that has crippled it, and prevented it from being able to stand on its own. The only chance that Nokia has to turn things around is to get acquired. Though this is a possibility, I believe it is a very, very remote one.

The potential to self-sustain? Doubtful.

Though proponents like to point out that Nokia is the world's second largest mobile phone manufacturer, this statistic holds little weight. Indeed, it was only a little over a year ago that Nokia was the world's largest  mobile phone supplier. More importantly, Nokia's second place standing has virtually nothing to do with its ability to sell high margin smartphones. Since announcing its decision to develop these devices exclusively on Microsoft (NASDAQ: MSFT), the company has continued to lose ground to top smartphone manufactures including Samsung (SSNLF), Apple (NASDAQ: AAPL) and even the struggling Research In Motion (RIMM). In contrast to its non-smartphone market traction, Nokia's smartphone market share is below 4%. Given that the smartphone sector is exponentially growing at a 43% yearly click, this is perhaps the most alarming metric indicative of Nokia's failing future prospects.

Value Investing 101

Of course, as with most investment opportunities, there are two sides to the story. Indeed, there are some who might consider Nokia an intriguing "value" opportunity.

Certainly, it wouldn't be too hard to take a look at the company's current balance sheet and think that with the current price hovering around $2.70, the telecom giant is undervalued. Cash is nearly $12 billion, debt/equity is 0.56, and book value/share is $2.74. On top of that, the latest Nokia smartphone, the Lumia, is selling for $100 less than Samsung's Galaxy S III and $200 less than Apple's iPhone. Additionally, the company seems to be trying to make all the right moves. There has been a ton of press proclaiming that Nokia is taking the necessary steps to redemption by cutting jobs, investing $40 billion in R&D and making changes to management.

To me however, this perception of Nokia as a floundering business with a chance to turn things around doesn't represent a real value opportunity. At least not in the sense that Benjamin Graham espoused in the Intelligent Investor. Since value investing is about investing in good businesses that are undervalued, in my view, Nokia, doesn't even qualify for the second part of Graham's equation because it's just not a good business, it's a bad one. Consider that in addition to the aforementioned negative performance trends, earnings in the trailing 12 months were -$910 million, operating cash flow was -$366 million and the decisions implemented by new management starting at the top with its hiring of CEO Stephen Elop in 2010, have been abysmal.

A Nokia Acquisition?

Clearly, I don't believe Nokia can stand on its own or that it's moving in the right direction, so where does that leave it?

Some say that it would be smart for Microsoft to acquire Nokia and at first glance, this move seems to make sense. After all, Nokia's market value is about $10 billion and Microsoft has over $66.6 billion in the bank. Additionally, Elop, a former Microsoft guy, has committed the company's smartphone play entirely to the Windows 8 operating system. Nokia also has some 36,000 telecommunications patents and a very valuable 15 year relationship with Qualcomm (QCOM) that allows it to use many of the chip maker's extensive patent arsenal in Nokia handsets. What with the Google (NASDAQ: GOOG) acquisition of Motorola Mobility (MMI), it would appear that there is now even precedent in which a software behemoth acquired a hardware giant so as to make inroads to the mobile phone market.

All that said, I don't think Microsoft will do it. With Nokia hemorrhaging cash, it's an acquisition that Microsoft doesn't need, and most importantly, one that doesn't make strategic sense. Moving forward, Microsoft is hoping for widespread adoption of Windows 8 for mobile devices and especially smartphones. In a nutshell, this means that they need all the other big smart phone manufacturers to adopt Microsoft 8 for their devices. They are simply too far behind in the game to build the phones themselves. If Microsoft buys Nokia, the other handset makers are a lot less likely to adopt Windows because they would expect Microsoft to give Nokia preferential treatment and advantages via the Windows platform.

Indeed, the popular comparison to the Google-Motorola acquisition is more like comparing apples to oranges. In stark contrast to a prospective Microsoft-Nokia deal, the Google-Motorola agreement took place between a smart phone OS provider with 75% market share (the world leader), that could ostensibly compete in a fully vertically integrated manner (manufacture both hardware and software), given its advantageous market positioning due to Android's success. Unfortunately for Nokia, Microsoft, unlike Google, doesn't even come close to enjoying this station. It's for this reason, above all others, that I think the acquisition will not happen.

In sum, it unfortunately doesn't appear that Nokia can stand alone, nor do I believe the company will be acquired by its most likely suitor. Consequently, I think that investing in Nokia at this point is far from a value play and might even be worse than simply picking red or black at the Roulette table in Vegas.

StockCroc1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services recommend Apple, Google, and Microsoft. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus