In my prior article "Nokia Set To Make Investors Very Happy" we considered encouraging signs of the company's revival. However, there are still the under-covered risks on Nokia (NOK) that are worthy of investor's attention. This article aims to help you see possible risks associated you may face in the future.
Investors worry about the shrinking revenues of Nokia and the success of the partnership with software giant Microsoft (MSFT). In this report, I am going to focus on the company's decreasing revenues and the future ahead as the fight in the smartphone arena intensifies.
Global market share of Nokia has fallen from 19.7% to 14.8% in Q1 2012 and 2013, respectively. Samsung (SSNLF.PK) is actually the leader in the market with a share of 23.6% while Apple (AAPL) is not far behind protecting 3rd place with a share of 9%.
Nokia's Big Bet
Nokia President Stephen A. Elop and the management team are now relying on a partnership with Microsoft (started February 11, 2011) to make smartphones based on the Windows Phone operating system.
Nokia accounted for 81.6% of all Windows Phone shipments in the second quarter, as IDC reported. Samsung was second with 11.5%, followed by HTC (HTCCY.OB) with 4.6% and Huawei with 2.3%. The Windows Phone was the fastest-growing operating system in Q2, up 77.6% year to year, but it's starting from a much smaller base than the leading smartphone operating systems, Google's (GOOG) Android and Apple's iOS. Android smartphone shipments rose 73.5% in Q2 and iOS phone shipments rose 20%.
The Windows Phone remains a distant third in the market, with a 3.7% market share. Android dominates with a 79.3% market share based on unit shipments, followed by iOS with 13.2%. BlackBerry's (BBRY) operating system has faded to fourth place with a 2.9% market share.
Source: Gartner (August 2013)
The Windows Blue version will improve sales for Windows 8 and commence the great migration from Microsoft Windows 7 to Windows 8. When the transition takes place, more and more users will be tempted to share the same client interface and integration between their PC and wireless devices and, therefore, will have more compelling reasons to make the switch to the Windows Phone.
For me, even in a best-case scenario where Windows takes off, I don't think Nokia will recapture its former glory and leadership in the market.
Nokia's revenue was down 24% for the second quarter, but the company managed to trim its net losses to $298 million from $1.6 billion last year due to cost cutting. Nokia furthermore reported a loss of 115 million euro's for the quarter, while the company's handset business lost 33 million euros on revenue of 2.72 billion euro's, a decrease of 32% from the same quarter last year and 6% sequentially.
The increase in Lumia sales did not help much. NOK sales of smartphones and feature phones is disappointing, and in the first quarter of the year the company lost almost 5 percentage points of world market share, according to the Gartner research firm. The company said it would continue to reduce costs and may cut up to 440 jobs globally in its mobile phones business. The positive note in the quarterly report was the improved profitability at Nokia Siemens Networks, where Nokia agreed in July to buy Siemens' (SI) stake.
Its net cash reserves fell to 4.1 billion euro's (or $5.4 billion) from 4.5 billion euro's in the previous quarter. The total Debt to Equity stands at 62, above the industry average.
The deteriorating NOKIA earnings the last five years shows that the company failed to follow the rapid changes in the smartphone arena.
Data from Reuters
Nokia has $12.64 billion in cash and an estimated $6.97 billion in debt on its books. Nokia recently closed out its balance sheet with $35 billion in assets above $18 billion in liabilities, which breaks down further to $17 billion worth of intangible assets.
NOK stock is 5.82% higher year to date and has an impressive 60% one-year return as investors hope the new products will boost the bottom line. The NOK current price level is 15% below the 52 week high of $4.90. The beta of 1.53 shows higher volatility with respect to the S&P 500. The stock is trading in the range of 2.27 to 4.90 for the last year. Currently, the stock is trading above the 50-Day Moving Average and 200-Day Moving Average.
Nokia's stock performance is following the decline of its earnings. In the last three years NOK has lost 53% of its market capitalization while AAPL gained more than 100% and Motorola (MSI) 84%.
Source: Yahoo Finance
Make or Break for Investors
Nokia has released several new handsets this year, including the lower-priced Lumia handsets, but the large base of established Android and Apple users attracts a larger base of developers to create the apps that run on the smartphones, which in turn attracts buyers. The company should release new, very attractive products to capture market share from Samsung and Apple and has to do this soon.
Of more concern is that the high-end smartphone market reported weak sales across the board sales as numbers from Samsung and Blackberry came in lower than expected. Sales of regular mobile phones, which account for over half of Nokia device sales, a valuable source of cash, were below expectations.
NOK has surpassed Blackberry and moved into third place in the United States, but that is of no value as even in its country of origin, Nokia has lost the leadership to Samsung.
Many investors would expect from me a final verdict suggesting that investing in the Nokia stock at the current price level is risky, after the 60% gains, and because it is lagging in the smartphone market race. However, the new Nokia Lumia Phones have good features (41 megapixel camera). I think it is too early to make any bleak projections so we have to wait until solid numbers surface.
The discouraging EPS path and increasing competition, makes investors feel uncomfortable. However, the cooperation with Microsoft looks like the milky way for the solid NOKIA earnings. I remain positive on Nokia as I have still the strong reasons to believe that.