Exactly one year ago, I published an article titled "Buying Nokia Below $3 Is Like Buying Ford Below $2." This was the most popular article I've ever written as it had nearly 43,000 readers and received 200 comments. While a lot of people agreed with the main premises of the article, a lot of people didn't really like my comparison. Now that a year has passed, it's time to reflect on it.
At the time the article was written, Nokia's (NOK) shares were trading at $2.73. At the time, the stock looked like it was in a never-ending free fall. Even after the article, Nokia continued to plunge until it found a bottom at $1.63 (mid-July). After finding its bottom, the shares rallied all the way up to $4.90 (mid-January); however, it didn't last long as the stock was on its way down to $3.05 (mid-April). Today, Nokia trades for $3.60 per share, which is up 32% since my article and up 121% since finding a bottom in July, but down 27% since reaching its 52-week high. On the other hand, Ford (F) jumped by 500% in less than a year after falling below $2.00.
Obviously, buying Ford below $2 turned out to be much more profitable than buying Nokia below $3.00, and I was only partially correct. Two questions come to mind. One, why didn't Nokia rally like Ford did? Two, what's next for Nokia investors? Many investors are impatient and they expect quick, risk-free and strong returns, which only happens in dreamland. It takes a long time to turn a company around. You can look at Hewlett-Packard (HPQ), a company that has been in the process of a turnaround for the last three years.
When people look at Ford and Alan Mulally, they think that Mulally became Ford's CEO after the company's stock price has bottomed at $1.38; however, this is far from the truth. Mulally (who I am a big fan of) became the CEO of Ford on Sept. 5, 2006. On that date, Ford's share price was at $8.50, which jumped to $8.80 after Ford's announcement of a new CEO. By the time 2006 was ending, Ford's share price was at $7.51. The share price was fairly flat in the first half of 2007; however, it started to fall further in the second part of the year. By the time 2007 ended, Ford's share price was as low as $6.13. This was down 30% from when Mulally became the new CEO 15 months ago. In 2008, the share price plunged to $1.42 and didn't recover back to $8.00 until August 2009, which signifies the third anniversary of Mulally as a CEO. It seems as if many people have forgotten how Ford didn't take off as soon as Mulally became CEO, but took a few years to turn around.
When Stephen Elop took the helm of Nokia on March 11, 2011, the company had nearly 130,000 employees -- half of which were employed by Nokia Siemens Networks. Now the company is a lot leaner with 94,000 employees; however, we are still looking at a very large corporation. In large companies with many departments and layers of management spanning across many products and services, it takes awhile to see the results of a turnaround. Exactly one year ago, these were some of Nokia's goals:
- Launch several Windows Phone 8 devices successfully.
- Launch a flagship phone comparable to competitors' flagship phones.
- Reduce headcount and related costs significantly.
- Reduce annual operating expenses of the Devices and Services segment by $1.3 billion.
- Reduce annual operating expenses of NSN by $1.3 billion.
- Achieve an operating profit in NSN eventually (no timeline was provided).
- Stop the cash bleeding eventually (no timeline was provided).
- Reach double-digit market share in smartphones eventually (no timeline was provided).
- Get rid of non-core assets and projects
The first goal was met successfully when Nokia launched several Windows Phone 8 devices between last November and now. In the beginning, there were some supply issues; however, most of those issues seem to have been overcome. The second goal was also met when Nokia's flagship phone Lumia 920 received comparable reviews to Apple's flagship device iPhone 5 and Samsung's flagship device Galaxy S3 (at the time). In fact, the phone was able to win many awards including -- but not limited to -- the Best Mobile Phone of 2012 award. Nokia's third goal was also met, as it reduced its headcount from 124,000 to 94,000 between the first quarter of 2012 and the first quarter of 2013.
The fourth goal was partly met. In the first quarter of 2013, Nokia's devices and services segment reported $924 million in operating costs. This was down from the $1.46 billion reported in the first quarter of 2012. If Nokia can continue this performance in the next three quarters, it will have cut $2.1 billion from operating costs for the full year. Remember, the company's goal was to cut operating costs by $1.3 billion annually, which will not be too difficult for Nokia to pass. The fifth goal was to cut operating costs of NSN by $1.3 billion on an annual basis. In the first quarter of 2013, NSN's operating costs totaled $991 million, down from the $1.22 billion reported in the first quarter of 2012. Effectively, the company cut its operating costs by $229 million per quarter, which could translate into $916 million per year. This may not be $1.3 billion, but it's still pretty impressive. The sixth goal (achieving operating profit in NSN) was met before the year ended. In the last quarter of 2012, NSN reported an operating margin of +14.4%, which is not only profitable but also very impressive. In fact, NSN carried the rest of the company with its performance in 2012.
Because of NSN's performance, the seventh goal (stopping cash bleeding) was also achieved. The company reported a positive cash flow in the last quarter of 2012, which signified the end of cash burn. The eighth goal hasn't been achieved yet. Nokia was aiming at reaching double-digit market share in the smartphone market eventually. The goal's target date was moved from "eventually" to "2014." This is a partial victory for Nokia because the double-digit market share goal now seems a lot more probable. I discussed this in one of my recent articles (click here). In fact, in some countries like England and Italy, the goal was already met.
The ninth goal was also partially achieved as the company got rid of some non-core assets, such as its headquarters, in order to raise some capital and focus on core issues. Here is the thing: When people look at Nokia's current situation, many of them are not impressed. People look at how Nokia is performing today but they forget to compare it to how Nokia was performing last year. When we look at where Nokia was last year, the company has made a lot of progress. The company went from burning cash and speeding toward bankruptcy to a company that's stabilizing, cutting costs, and pushing high-quality products. Yes, Nokia isn't making money like Apple and Samsung are; however, the company isn't losing money like it was last year either.
It's easy to forget where Nokia was just last year and ignore all the progress that was made by the company. However, the company has achieved a lot during a short time. I expect Nokia's transition to be completed in 2013 and the company to become a major player in the smartphone market by 2014. Unfortunately, I don't have a price target for Nokia, but I know that there is much more upside potential in front of this company than there is downside potential.