- Stiff competition will halt Nokia’s growth.
- Nokia is spending cash on buybacks and dividends which will not sustain long-term growth.
- Investors should stay away from Nokia for the time being.
After selling its devices business to Microsoft (NASDAQ:MSFT), it was expected that Nokia (NYSE:NOK) will be able to focus on more profitable areas and turn its fortunes around. However, the company is facing competition in its new focus areas as well.
After facing tough competition from Apple's (NASDAQ:AAPL) iPhones and Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) Android-based smartphones, Nokia had to sell its devices business to Microsoft for $7.5 billion. Currently, the networks segment is the core of the company, accounting for almost 87% of its revenue. The networks division is not performing well as it reported a 17% annual decline in sales, and if it continues to underperform, Nokia might be in trouble. This is where Nokia's competitors, Alcatel-Lucent (NYSE:ALU) and Juniper Networks (NYSE:JNPR) have an upper hand.
Peers on the front foot
While Alcatel depends on networking for only 46% of its revenue, it produced year-over-year revenue growth of 7%. Meanwhile, Juniper delivered a way more strong performance with around 88% of its business reporting year-over-year revenue growth of at least 6%. While Nokia is encountering a slowdown in LTE roll-out, Alcatel-Lucent reported that its LTE business is doing well. In addition, as Nokia is losing sales, its rivals are reporting strong growth in the same segments. Diminishing market share is not good for Nokia and its investors.
Facing stiff challenges
Nokia's HERE is delivering poor results due to weak demand for Personal Navigation Devices. These GPS devices have been taken over by smartphones, which deliver more powerful results. Consumers can now download GPS-enabled mapping software on their smartphones, and hence, there's no need to buy a PND device. With strong growth in the smartphone market, Nokia is not too far away from losing its automotive map market.
Nokia is also behind Google and Apple in its mapping business. While Google has about 1 billion maps installed on Android devices, HERE has 100 million apps installed on Nokia and Windows 8 devices. Although the market share of Windows 8 devices is growing, there's no way that it can match up with the very well established and vast Android platform. The competition is increasing with Apple jumping into the maps business and the automotive business as well. Apple's CarPlay for automobiles is another threat to Nokia, as it will be using Apple Maps.
The special dividend and proposed share repurchases are expected to cost Nokia over $2.5 billion. Nokia already has limited free cash flow, and in addition, its diluted share count has gone up 7% in the previous year. Also, the question is how long will it take for the company to regain the cash it is about to spend. In my opinion, it would take nearly 10 years to recover even half of what the company is about to pay out.
SAC Capital Advisors' recent 13F shows that the company has reduced its stake in Nokia, and it may be a sign of bad things to come. Nokia has been on an acquisition spree ever since it sold its handset business to Microsoft, and it may struggle to integrate all the M&A into its core business.
Nokia has initiated a 5 billion euro capital restructuring program. Under this program, the company will start a 1.7 billion euro share buyback program and will pay a special dividend of 0.26 euro per share, totaling 1 billion euro, while the remaining 2.75 billion euro is to be used to reduce the debt.
Although Nokia has handed over its handset division to Microsoft, the company still remains in trouble as only the short-term investors will benefit from dividends and share repurchases, while the long-term investors still have to face a hard time.
The company is still not profitable and it is spending money on repurchases and buybacks. So, investors should consider staying away from Nokia as it looks like a weak prospect for the long run.
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