While the remnant Nokia (NOK) bulls prepare to make their last stand, it looks doubtful that the company will live up to hopes. The firm has continued to operationally stumble and hit a new 52-week low in recent weeks. The recent failure to offload Nokia Siemens Networks has only added to the list of issues giving the firm a headache. It goes without saying the last few months alone have been rough on the firm and we don’t see anything that could immediately change this bleak path.
Now the bulls are going to come in and say that the stock is cheap, argue that it generates a good amount of cash flow, and is still a huge player in its space. That’s all technically true, but unfortunately it doesn’t matter in our view. Nokia basically looks like a giant value trap, the textbook definition of which is a company that looks cheap from a valuation perspective or historical measure. We feel like Nokia fits this description well. After all, Warren Buffett once said, “Price is what you pay, value is what you get,” and with Nokia, those words couldn’t ring truer. We continue to rate Nokia a pass, given that it lacks strong catalysts that could otherwise help turn the firm around and that it currently holds key value trap characteristics that we can’t turn a blind eye to.
Fundamentals Meaningless Without Ideas
Watching Nokia’s stock get pushed lower while simultaneously generating positive cash flow was the first red flag we noticed. In the case of Nokia, it’s a red flag because even though the firm is generating solid cash flow, investors fear that the firm is relying heavily on its legacy empire to stay in business. At the same time, this exactly is what bulls are touting about Nokia. They’re arguing that the firm is a huge player in its space and that by default it can’t just disappear. To argue that because of the firm’s size and historical dominance it can’t go under is a foolish stance to take.
Investors don’t solely care about what a company has already done. Instead, they often care more about what a company is doing now and future projections. One needs to remember that Nokia is a publicly traded company and not privately held (hence the stock ticker). What this means is that fundamentals alone won’t dictate the value of this firm, given that it’s in the public arena. Instead, it will be valued in some combinative form of perception and underlying fundamentals.
At face value, Nokia may actually have decent fundamentals. Still, the firm’s perceived value relative to future potential is in the gutter according to the investment community. In our view, Nokia so far hasn’t been able to successfully leverage its positive cash flow to regain positive momentum, has been heavily discounted because of this reality, and this is just one reason why it’s a value trap.
The Difference Between a Catalyst and a Strong Catalyst
For Nokia, a catalyst would be anything new that drives top line growth higher. This could be a service, product, or combination of both. A typical value trap doesn’t actually lack catalysts, it just lacks great catalysts. Nokia does have a catalyst, the N9 smart phone, but the problem is that investors don’t really care about it. This primarily stems from the fact that the firm has launched the N9 with an operating system it plans on discounting shortly. At the same time it's also paired up with Microsoft (MSFT) for a new smart phone operating system which most investors don’t find too thrilling either. Since Nokia already planned on dropping its current operating system, we think the smart move would have been to adopt Google’s (GOOG) Android system as a temporary fix to the situation. If it had it done this, it could have gotten some positive buzz around the N9 as opposed to almost zero buzz compared to Apple’s (AAPL) iPhone.
Investors understand Nokia has “a catalyst” but few in the investment community think it’s a strong catalyst. Then add in Microsoft, Nokia’s new operating system partner, which is playing devil’s advocate through Nortel (NT) patents relative to Google’s Droid and it just looks like a giant mess. It makes many wonder how serious Microsoft really is relative to the alliance with Nokia. Ultimately, what this spells out is that Nokia is even more of a value trap because of its crummy catalyst relative to competitors' and how dopey it looks for partnering with Microsoft instead of just using Droid.
Nokia seems to be all over the place. It failed to sell one of its major assets a few weeks ago and took a huge hit in the market over it. This will only distract the firm further from potentially more lucrative ideas and projects. Then it’s selling the new N9 with a operating system it wants to drop. With the one ray of light in our view, positive cash flow, continuing to be discounted heavily until the firm turns itself around, we think it’s a good idea to steer clear for the time being.
Down the line, Nokia could easily change from a value trap into a deep value discount firm if it can get some strong catalysts in place and execute well on them. Perhaps once earnings are released it will show signs of new life, but we aren’t holding our breath. This would definitely illustrate to the investment community that Nokia is getting its house in order. Until this happens, there is no reason to deposit cash in this value trap today.