Nokia Lumia: No Killer Apps, Investors Lose

Mar.20.13 | About: Nokia Corporation (NOK)

On February 11, 2011, Nokia (NYSE:NOK) and Microsoft (NASDAQ:MSFT) announced plans for what both companies described as a "broad strategic partnership." The original terms of this agreement intimated that Microsoft would offer up its Windows operating system software, in exchange for exclusive licensing rights to Nokia hardware. As a sign of the times, this deal was consummated quietly, as stakeholders and regulators foreshadowed that a Nokia - Microsoft alliance would levy minimal impact upon the smartphone market.

As recently as the year 2000, a Microsoft - Nokia partnership would have been unfathomable as both companies controlled their respective markets with leading market shares. Microsoft, in fact, was then staring down the barrel of U.S. Department of Justice and European Union anti-trust lawsuits that threatened to break up the alleged monopoly. Today, neither operation is capable of producing that "killer" application to challenge the Apple iOS - Google Android duopoly. The smartphone is now a commodity, which means that long-term Nokia investors will lose.

The Killer Application

The killer application, or app, may be best described as revolutionary software that bridges the chasm separating the dot-com and Web 2.0 eras. The killer app, of course, tracks a hyper-accelerated business cycle throughout the prototype, growth, maturity, decline, and ultimately, bust stages. Taken further, multi-billion dollar corporations and entire ecosystems are now built upon series of integrated killer applications. Web 2.0 analysts and consumers may describe Facebook (NASDAQ:FB) social media, Pandora (NYSE:P) streaming music, and Google (NASDAQ:GOOG) search as killer apps. In terms of financial dominance, the Apple (NASDAQ:AAPL) iPhone is the primary gateway into all popular Web 2.0 applications. Without a killer application, the Microsoft - Nokia partnership will never alter this paradigm.

On March 6, 2013, research firm comScore released its latest report for January 2013 U.S. smartphone subscriber market share. This report presents averages of data for the quarterly period between October 2012 and January 2013, and confirms the presence of an Apple iOS and Google Android duopoly atop the market. For the latest quarter, Google Android and Apple iOS operating systems powered a combined 80% of U.S. smartphones. On the other side of the ledger, Apple and Samsung are itemized at respective one and two slots, as original equipment makers. In fact, Apple continues to consolidate power, as evidenced by its 3.5% increase in share for each individual classification, above the prior quarter.

At the bottom of the heap, BlackBerry (NASDAQ:BBRY), Microsoft Windows, and the now effectively defunct Nokia Symbian operating systems are left to battle over the remaining scraps of the smartphone market. Alarmingly, market share for these have nots continues to shrink towards oblivion. This is a game of musical chairs, where Apple and Google already occupy two out of three chairs in the room. When markets mature and commoditize, industry consolidation is inevitable.

Nokia Lumia 920 Specifications

Nokia promotes its latest Lumia 920 as a fun phone "designed to wow." The company also boasts of the fact that the Lumia 920 brought home the 2012 Reader's Choice Smartphone of the Year for the Engadget Awards 2012. Nokia offers its 920 in five separate colors, which include turquoise, old gold, and fire red. Qualcomm's (NASDAQ:QCOM) popular Snapdragon processor powers this phone, which is notable for the picture clarity of its PureView camera alongside the functionality of Nokia Maps. Despite positive reviews, Nokia Lumia 920 specifications are far from revolutionary.

On January 24, 2013, Nokia released its earnings report for the fourth quarterly period ended December 31, 2012. For Q4 2012, Nokia reported sales of 6.6 million smart device units. This total is a slight improvement above the prior quarter, when Nokia sold 6.3 million smart device units. On a year-over-year basis, however, Nokia posted a staggering 66% collapse in smartphone device unit volume. This data indicates that Nokia executives could barely capitalize upon a series of perfect storm fourth quarter events that matched the Lumia 920 Holiday Season launch alongside Apple iPhone 5 supply chain bottlenecks. Now, Nokia engineers are forced to effectively ward off assaults from recent BlackBerry 10 and Samsung Galaxy S IV launches, prior to the inevitable iPhone 5S or iPhone 6 launch projected for later this year.

Ongoing legal wrangling between Apple and Samsung, deteriorating patent valuations, and the shocking six-month collapse of Apple shares from $705 to $450 indicate that the smartphone market peaked during summer 2012. Prior to last summer, Google closed out its $12.5 billion acquisition of Motorola, in order to shield Android patents away from litigation. This past January, however, the Federal Trade Commission ordered Google to provide competitors with access to the very same former Motorola patents "on fair, reasonable, and nondiscriminatory terms." Therese Poletti and Market Watch intimate that the smartphone patent bubble has already burst.

Going forward, research firm IDC projects a sharp deceleration in the growth of global smartphone shipments over the next year. According to the IDC forecast, smartphone shipments will approach 920 million units, which projects out to 29% growth. In 2012, smartphone shipments recorded a staggering 44% year-over-year growth. Industry trends and forecasts indicate that Nokia shareholders should prepare for another Lumia launch bust, while they also gauge valuations for the individual software, hardware, and networking wings of this overall business. Fundamental analysis indicates that Nokia is a strong sell, as it would be unable to generate serious outside buying interest amid any organized and strategic break up.

The Bottom Line

For Q4 2012, Nokia posted a relatively small net income of $330 million. This lone financial bright spot served to bookend a year when Nokia reported $4.9 billion in total losses. Again, Nokia's profitable fourth quarter juxtaposed the perfect storm of a critical Lumia 920 Holiday Season launch against Apple's iPhone 5 product shortages. As time marches on, Nokia's fourth quarter success will appear more so as a flash in the pan, instead of a long-term growth trend. Nokia brass already effectively confirmed these sentiments, as the company suspended its dividend and warned of flagging 2013 Lumia sales during the latest earnings conference call.

Suspending the dividend will preserve more than $1 billion in cash flow over the next year. Nokia's latest financial engineering move arrives after countless rounds of layoffs, debt restructurings, and real estate consolidations over the past several years. Nokia shareholders are committing to an unjustifiable gamble that this business may literally "float the note" through financial engineering and buy time until its technicians deliver a blockbuster product to market. Theoretically all assets, and consequently, shareholder equity will depreciate towards zero, if these line items cannot be leveraged for profit.

Nokia closed out its latest quarter with $38.8 billion in total assets atop $26.5 billion in total liabilities. Broken down further, the Nokia balance sheet includes $7.1 billion worth of goodwill and intangible assets. The aforementioned Google's acquisition of Motorola and subsequent Fair Trade Commission order to permit access to the combined patent portfolio may further serve as testimony that Nokia's intellectual property is illiquid and unable to attract economic demand. With this information in mind, Nokia's tangible book value is now less than zero, despite the fact that this business now trades for $12.5 billion in market capitalization.

Nokia stock is overvalued. Conservative investors should sell Nokia shares now - in order to mitigate the risks of eventual business bankruptcy and staggering losses.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.