Not long ago, though, I wrote in that article's comments that I had dropped Nokia at breakeven. The reason is simple: I am growing more and more negative on its prospects. For once, there's a clear glut emerging on the smartphone market - every other manufacturer is seeing this growing segment of the market as the potential savior both for volume and for margins. The trend is so clear that an LCD TV-like glut is all but unavoidable, with dire consequences for everyone's margins (including Nokia's) until many of the players are simply forced out from the market.
Also, the headlong plunge into this market by every player is soon to have another consequence: the prices charged for low-end smartphones will get lower and lower and start competing with feature phones. This same point is made by Hsieh Ching-chiang, from MediaTek, on Digitimes. This accelerating trend will mean another powerful blow against Nokia, because Nokia is dominant in the feature-phone market, a market that's already stagnated and, with this trend in mind, might go the way of the dodo bird in just a few years.
Presently, smartphone penetration in the mobile phone market is already above 50% in the developed markets of Europe and North America, while still lagging in emerging markets (source: Vision Mobile). But this is changing rapidly, with feature phone sales actually decreasing while smartphones explode higher (54.7% growth year-over-year on Q4 2011, 61.3% growth year-on-year for the whole of 2011; source: IDC), leading to a volume decrease for Nokia (2011 sales, 422.5 million units, 2010 sales, 461.3 million units; source: Gartner).
These two trends thus form the basis for me becoming negative on Nokia: on one hand, the smartphone segment will turn viciously competitive and margins will implode there, while there's no certainty that Nokia will be able to grow fast enough to compensate volume losses on the feature phone market; on the other, the implosion of the feature phone market will accelerate as low-end smartphones quickly cannibalize it, leading to pronounced volume losses for Nokia and difficulty in absorbing fixed costs.
Nokia is simply between a rock and a hard place, and the likelihood that it will emerge victorious seems too small to contemplate a positive opinion. I am not saying Nokia is a short, though, only that it's not a buy.
Is there hope?
For there to be hope for Nokia, Windows Phone would have to be a tremendous success. Right now though, Microsoft (MSFT) is lagging in technological terms, it still doesn't have dual-core support, it still doesn't support higher resolution screens. This happens to be at a time when Android based solutions, open and free as they are, seem to be picking up technological speed. It's even rumored that the Samsung Galaxy SIII will already have a 1080i super AMOLED screen.
Of course, Microsoft could still decide to buy Nokia. That's the 'black swan' event here. Although it doesn't constitute a reason to buy Nokia, it surely constitutes a reason not to short it.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.