It seems that the end of an era is coming in the mobile phone industry as long-time titan Nokia (NOK) faces increased competition, slumping sales, and now-or-never pressure to rejuvenate its stale business model. When the company reported earnings last week, the Street was hoping for a reason to believe in the beleaguered stock, but instead shares fell to $3.02 - their lowest levels in five months and a 93% discount to the stock's 2007 high of $42.22. Traders who have held steadfast in their NOK investment are finally realizing that the time has come - the deep discount to previous highs is justified because of the company's dying business model. NOK is still breathing life, but I'm afraid that won't continue much longer.
Weak Product Portfolio
NOK has seen moderate success since the launch of the Lumia 920, without which the company would be in critical financial condition. The entire Lumia line, which is powered by Microsoft's (MSFT) Windows operating system, has driven the financials since late 2011. During the most recent quarterly report, the company noted that Lumia sales rose 27% in the period to 5.6 million units, which was better than expected. Even so, the momentum in the smartphone marketplace was not enough to keep investors happy.
The main reason why the moderate success fell short of overall portfolio expectations is because smartphones only account for 9% of the company's total mobile phone sales. During the same quarter, NOK shipped 55.8 million basic phones, a downsizing of 21% year over year. The sharp drop in basic phone shipments is the leading cause for concern. It's also the company's greatest source of revenue, and because of the drop, NOK reported net sales down 20% year over year. The Street had forecast for a decrease in revenue, but the drop was 58% larger than anticipated.
Shares of Apple (AAPL) have tanked since reaching highs of $705 late in 2012, currently trading at $410, a 42% discount to those highs. Many investors pegged the problem at AAPL to two deciding factors - too much cash without shareholder reward and lack of innovation in the pipeline amidst an accelerating increase in competition. With the most recent earnings call, AAPL CEO Tim Cook keenly addressed the issue of cash by instituting the largest dividend of any American company and committing to repurchase $50 billion in stock. Shares are up just 1% since that announcement a few days ago, which leads me to believe that the core problem affecting the share price is the concern over the lack of innovation.
AAPL, which sold 37.4 million iPhones during the previous quarter, and NOK, which, as previously noted, sold 5.6 million Lumia smartphones during the same quarter, are in the same pipeline predicament. AAPL, though, is engaged in several other profitable markets, notably with their iPad and iPad Mini in the tablet market. NOK, on the other hand, from a product perspective, has no exposure to the vastly-growing tablet market. During their quarterly conference call, CEO Stephen Elop addressed the desire to move into the "phablet" market, which is a hybrid between a smartphone and tablet (with regard to size). He also noted the company's interest in expanding the Lumia line. Unfortunately for shareholders, the guidance was vague and addressed no possible new product launch release dates. Uncertainty and slow movement has hampered the once-powerful NOK from being first to market in all of its product-based business, and the ultimate losers have been shareholders.
The potential for AAPL to enter the low-price smartphone market in Asia, the potential rejuvenation of BlackBerry (BBRY) - which is not yet proven - and the continued rise of Android-powered Samsung phones are all significant and credible threats to the core business model of NOK. Competition is tightening and there is no need for four major players in the industry. Consolidation is coming, and BBRY or NOK will be first to go.
By no means do I believe that NOK is at risk for bankruptcy. While they burned through $284 million in cash during FY2012 and an additional $271 million during Q1 2013, the company is forecasting profitability this year and the current cash and equivalents are strong enough to cover current liabilities and future debt payments for some significant time. However, NOK doesn't seem like it is ready or able to innovate, build new product mixes into the pipeline, and turn the corner towards renewed profitability. As the company continues to shrink it could eventually become a takeover target. Though they've decreased significantly over the past five fiscal years, NOK does have ownership to over $600 million in valuable patents. If MSFT feels that NOK is threatened to keep performing in the marketplace, they could acquire the company and develop their mobile hardware business.
In the short-term, NOK is making lower lows and lower highs after extending back up to $4.60 in January. The stock is in short-term bearish territory and trending lower. I'm staying away, and I hope you do too.