Nokia: Likely to Lose Smartphone Wars

by: Peter Navarro

Working with analysts Greg Autry and Jaysen Harris, I previously called for shorting Palm (PALM) when it was at $12 (it went as low as four dollars) and Research in Motion (RIMM) at $70 (it has gone as low as $47). In this article, Autry, Harris, and I are going to continue with another dumb company likely to lose in the smart phone wars, Nokia (NYSE:NOK).

With recurring revenue from apps and ads, Smartphones are everything that Nokia’s low-end, low-margin products are not. More broadly, the Finnish maker of low cost handsets for the developing world and European feature phones faces many of the problems that have plagued companies like Palm and Research in Motion – while Nokia also has a fatal attraction for Windows mobile.

With three phone Operating Systems and no smart device that works on the current U.S. CDMA networks, Nokiai has found itself completely marginalized in the competitive race between Apple’s (NASDAQ:AAPL) iPhone OS and Google’s (NASDAQ:GOOG) Android to gather apps and users.

To fix their U.S. problem, Nokia has hired American Steven Elop as CEO. However, with an American at the helm of the Finnish company, there are likely to be organizational cultural problems. As with the first years of Howard Stringer at Sony (NYSE:SNE), it may very well be sometime before Elop’s new strategies have any impact.

To help them better understand American innovation, Nokia has also hired a fellow in Elop who admits he has a "lot to learn" about Nokia and Finland. Given that Elop’s history is with Microsoft (NASDAQ:MSFT) and that he negotiated to bring the unloved Windows Mobile to Nokia just a few months back, we find it unlikely that Nokia will “do the right thing” and marry Google’s Android operating system to their very solid hardware offerings.

On the plus side, in a joint venture with Siemens (SI), Nokia has experience in international phone networks and infrastructure that Apple can only dream of. That said, the one thing Nokia has proven is that it is NOT a developer of easy to use mobile platforms -- something that Microsoft ironically is guilty of as well.

Our point is this: Bringing Windows Phone 7 in at this point would be like giving pneumonia to the cancer patient. Two losers simply will not make a winner -- as LG (OTC:LGERF) has so aptly demonstrated with their own Windows Mobile bomb.

For all these reasons, we recommend a short on this stock. While it has been in decline for some time- in fact it is down 75% over the last 3 years - NOK is just now coming off of a nice “dead cat bounce” and barring any surprises, it should resume its previous downward trend.

With a healthy P/E ratio and large market cap, there is still plenty of room for another 50% or more drop in this stock. So ride it all the way down, unless the company shows signs of coming to their senses by supporting CDMA and moving to Android. If that happens, close the short and go long because other than their lack of U.S. presence and the resulting poor OS choices, NOK has what it takes to compete in this market.

Disclosure: Short NOK