Here's something you don't see every day; a company that is a leading provider of a product in a growing industry, yet that company is grossly irrelevant at the same time. Unfortunately, this has become Nokia's (NYSE:NOK) biggest claim to fame.
Despite how many times Nokia has tried to revive itself from death's grip, it's becoming increasingly evident that the company's fate won't change. And now that BlackBerry (NASDAQ:BBRY) is no longer the industry's punch line, investors have to wonder if Nokia's fortunes are ever going to change. To that end, first-quarter results only introduced more doubt.
It's no longer of matter of when
Despite what Nokia bulls may want to believe in terms of the company's progress, Nokia shares are still down more than 13% on the year. And it's not because management has "out-executed" the competition - although this is a popular claim from the company's shareholders. While we do appreciate the optimism, management's Q1 performance only affirmed that the "glass-half-full" outlook by the company's shareholders, is misguided.
The first thing we took away from the quarter was that consumers aren't buying Nokia phones. How else can the 20% decline in revenue be explained, especially since sales also declined 27% sequentially? Not only did Nokia miss revenue estimates, but we saw the extent of the miss (by 10%) as unnerving, given the continued struggles of the device business, which fell again backwards by 32% year over year.
Remarkably, device sales still managed to post declines despite the 30% sequential improvement in Lumia sales. It's become time that investors ask the most logical question at this point; when will this company ever rebound if management has not been able to turn things around during a period when both Apple (NASDAQ:AAPL) and BlackBerry have seen their darkest days?
The fact that Nokia has been unable to seize this opening is a huge indictment on management's ability to execute. At the same time, we think investors would be better served hopping on the BlackBerry Bandwagon. Despite having suffered similar struggles as Nokia over the years, we (at least) see better upside from BlackBerry on the strength of the company's new BB10 platform phones.
What's more, there is now ample evidence that BlackBerry's management has a better handle than Nokia on the device business. BlackBerry bears are quick to point out that the company posted a 36% decline in revenue. While we won't debate this fact, the company is nonetheless making sequential improvements - unlike Nokia. And on a year-over-year basis, the rate of BlackBerry's decline has actually decelerated by 14%, helped (in part) to BlackBerry's new flagship BlackBerry 10 phones.
Granted, we're not going to pretend that BlackBerry is back to strong growth status. But unlike Nokia, the positive signs are there. And from a fundamental perspective, the differences between the two companies are not close at all, given BlackBerry's $2.6 billion in cash and zero debt, compared to Nokia's debt burden of $7.2 billion. Plus, from an operating cash flow perspective, Nokia's $572 million is almost one-fifth of BlackBerry's $2.3 billion.
How did things get so bad?
Remarkably, despite Nokia's continued struggles, investors still rush to make excuses, while ignoring the fact that this company had (at one point) lost 80% of its value in just four years. This dramatic decline was not by accident. The technological breakthroughs from Apple's iPhone changed the game forever, and Nokia was nowhere near ready to compete on that basis. To a lesser degree, admittedly, neither was BlackBerry.
But the fact that Nokia was being attacked from multiple positions, coupled with BlackBerry's dominance in the enterprise, squeezed Nokia's market position . And this quarter's report suggests that recent improvements are having no meaningful impact to grow the company's market share. Finally, it's time for the Street to fully acknowledge the obvious; this partnership that Nokia has with Microsoft (NASDAQ:MSFT) has likely hurt the company more than it has helped. And at this point, we don't see how an investor can have any faith in this company.
Investors are hanging on to the idea that the company's fortunes will turn and the Lumia will be a raging success. This is not impossible. But we don't believe that Nokia has the management in place to execute this turnaround. While we do value the company's cost-cutting efforts, companies don't "save" their way into more business and market share.
Nokia will eventually have to spend to survive. Although its relationship with Microsoft can serve as a temporary crutch, it's also a Trojan horse as it seems Microsoft has hurt Nokia more than it has helped. In the meantime, we would turn our attention to a more likely turnaround candidate in BlackBerry, which has considerably more earnings potential and (if nothing else) is a possible acquisition candidate.
Disclosure: I am long AAPL. 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.