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Nokia (NYSE:NOK) is something of an oddity. For roughly fifteen years, this firm was essentially the world leader in smart phones sales (basically since smart phones were invented) but today that title isn’t quite so clear or guaranteed as it looks ahead.

When glancing over the financials, the firm obviously isn’t in bad shape. Yet it hasn’t done much in terms of bringing forward blockbuster smart phones. Instead, it seems like the biggest issue is a lack of clear direction for the firm. The firm’s most recent example of this was the N9 model release that uses an operating system that the company is in the process of abandoning.

Today, the smart phone space is a very different landscape from when Nokia was the unquestionable champion. Today firms such as Apple (NASDAQ:AAPL) have become powerful players in the smart phone market in a very short period of time and have exceeded expectations. Further, the crown for “smart phone king” is now pretty much up for grabs between Nokia, Apple, and Samsung Electronics (OTC:SSNLF). From our perspective it’s pretty clear that the “smart phone king” has lost control of the situation and his crown. We rate Nokia a pass for reasons that center on management concerns and deteriorating trends.

Not Hungry Enough

Looking back over the last five to ten years, it’s become pretty clear that management at Nokia honestly didn’t stay hungry enough to keep the lead. The firm was king of the hill and we have little doubt it felt good to be king, but that’s no excuse for getting lazy. The firm seems to have rested on its laurels for too long while firms such as Apple came out of nowhere, took advantage, and completely blindsided the firm. For instance, Apple has even beat Nokia on its own home turf in Europe by taking the position of number one provider of smart phones in Europe. This is only more frustrating given the firm’s R&D capabilities and strong balance sheet.

Concerning Trends:

Year

2007

2008 2009

2010

TTM

COGS (% of Sales)

66.11%

65.74%

67.64%

69.80%

70.42%

Operating Margin

15.64%

9.79%

2.92%

4.88%

4.66%

Return on Equity

53.84%

27.59%

6.52%

13.47%

13.11%

3-Year Av. Revenue Growth

20.47%

14.06%

14.06%

-5.93%

NA

From our perspective it doesn’t even look like the firm started trying to get things together till it had two competitors literally breathing down its neck. At this point we feel that the firm’s management is still too laid back given the circumstances and this makes us question whether they can even read the competitive landscape that well anymore. With concerns like this we had no choice but to rank Nokia a pass for right now.

Too Much Riding on Too Few Things

Nokia looks like it has entered some type of gladiatorial do or die competition in the smart phone space. In response to competitive forces, the firm now has too much riding on too few things from our perspective. If the firm’s newest phone is a smash hit then it gets to “hopefully” keep its lead in the global smart phones sales race. If Nokia loses this gladiatorial death match, it will likely become an afterthought in relation to the smart phone space.

Nokia’s strategic partnership with Microsoft looks like an act of desperation to stay alive in the smart phone space rather than an act of true opportunity. Let’s be realistic and acknowledge the fact that Microsoft (NASDAQ:MSFT) isn’t known for being a leading player in the smart phone operating system world and has much less at stake than Nokia. Yes we understand it’s Microsoft, but last time we checked it has been some time since people were super hyped up about a new Windows operating system, let alone one for a smart phone. Of course there wasn’t much of an alternative for Nokia given that the Symbian and Meego platforms were failing them.

The takeaway point here is that Nokia has far too much riding on its strategic relationship with Microsoft and its latest smart phone in order to stay competitive. If either fall short of being spectacular, the firm doesn’t have much left to go on in terms of a back up plan from what we see.

Conclusion:

Nokia has been backed into a corner, taking swings in an uncoordinated manner, making decisions out of desperation, getting market share stolen by strong competitors, and all the while trying to keep its razor thin lead in smart phone sales worldwide. Nokia isn’t going up in smoke from our perspective but it doesn’t have too much to look forward to and it seems the firm has materially changed in a negative way. In addition, it’s questionable on whether Nokia’s management can tactfully navigate this highly competitive space. We see no reason to take unnecessary risk by tying up capital in a firm like this unless we were looking for a Hail Mary trade.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: 3 Reasons to Avoid Nokia