It is virtually impossible to be both the market leader in an ever growing industry and yet be grossly irrelevant at the same time. But then there is phone giant Nokia (NOK) which has proven that there is no such thing as impossible. It still comes as a surprise to many to learn that Nokia is still the world's largest mobile phone maker. However, what is not a surprise is that Apple (AAPL) as well as other growing competitors have all but sealed its fate in the race for smart phone dominance as the company continues to show that it is unable to keep up.
Nokia has now lost 75% of its market value in the last four years. Though it may still be one of the giants in the mobile phone industry, it has seen its market share plummet to drastic lows over the last 12 months. This really has left me scratching my head. How is it possible that a company can be both No. 1 in its industry and still be this much in trouble? I have researched as far back as possible and I have not been able to recall another time when this has happened.
How did things get so bad?
Investors can answer this question in one word - Apple. Its iPhone dominance and overall success in the smart phone market has been well documented and is probably the single biggest reason behind Nokia's struggles. The technological breakthroughs from the iPhone changed the game forever, and Nokia was nowhere near ready to compete on that basis. To a lesser degree, Research in Motion's (RIMM) Blackberry has always been a big player in corporate circles, though it's now facing challenges as well. Its early entry into the smart phone market, as well as its success, contributed to the loss share that Nokia has had to absorb.
Is there reason for optimism?
It's safe to say that Wall Street was not expecting a whole lot from the company during its recent earnings announcement. The company reported fourth quarter revenue growth of 11% on a sequential basis although it was down 21% on an annual basis. However, the company showed considerable improvement in profits. Although its gross margin was down from the previous year, it was from the prior quarter with device gross margins still lagging the company average. Adjusted operating profit was down 56% from last year, but up about 90% on a sequential basis.
Investors have to be optimistic about the fact that the company reported a 6% increase in device shipments over the prior quarter - this continues to be why it leads the market overall in phones. But it's not doing that well in the area of smart phones where Apple and Google (GOOG) still dominate. However, it did show an increase of 17% in unit growth for the quarter. But it says a lot that it continues to lag behind another laggard in Research In Motion
There is reason to believe that Nokia's fortunes may take a sudden turn for the better. The Lumia, the first creation in its joint venture with Microsoft (MSFT), appears to be well received overseas. I am eager to see how it does in the United States when it becomes available later this spring since the early reviews have all been positive. The question is, is all of this optimism enough to make investors think that the company is now ready to take on Apple? If nothing else, can it make a dent in its market share?
Nokia does not get the respect that it deserves. Admittedly it has fallen off considerably since the advent of the smart phone but there is something to be said about the fact that it is yet the leader in the overall phone category and does not appear to be slowing down especially considering how quickly is was able to produce phones by virtue of its partnership with Microsoft. That being said, I think the company appreciates that any progress that it seeks to make is not going to come easy as the space is extremely over-crowded with competition.
This is yet another turnaround story to keep an eye on. As much as I have made about how dominant Apple has been, I don't think that should be Nokia's immediate focus nor should that be a measure of how successful it becomes. The company needs to continue to prove that it can design phones that people want to buy and leverage its Microsoft partnership in a way that it can create separation from the rest of the pack from the likes of RIM, HTC and Samsung. Value investors who enjoy turnaround stories may want to give Nokia a long look at current levels.