A few years ago when I was buying shares of Ford (F) at prices below $2, my friends kept telling me I was crazy. They told me I was throwing good money after bad money. Then my investment in Ford returned me about 900% in 3 years. Now the same friends are saying the same thing to me as I add to my Nokia (NOK) shares at prices below $3 - not to mention when I increased my Bank of America (BAC) exposure when it fell below $5 last year. Many people say "you are just speculating," however, I wouldn't call buying shares of Nokia speculation, just like I wouldn't call buying shares of Ford as a speculation in 2009. Speculation is something different.
This is an example of speculating: XYZ is a drug company that never got FDA approval in its history. Currently it is working on a secret project and the company says that soon it will acquire FDA approval for its project and this project will be able to cure a very common but difficult-to-treat disease. Investors buy shares of this company without even knowing whether it will ever receive FDA approval and if the drug will really do what it says it will.
Another example of speculating: an oil company is searching oil in the desert. This will be the company's first attempt at finding oil, and if the company successfully locates oil, it will start production and become profitable. This may or may not happen. Investors buy the stocks of the company, hoping it finds oil.
Final example of speculating: a company does really badly, it hasn't made profit in years and it shows no signs of life or turnaround, so investors buy the company hoping that another company will buy it out as this is the only chance the company will ever survive.
However, this is not speculating: a well established international corporation with more than 130,000 employees and $40 billion in annual revenue realizes that there is stiff competition in the market and decides to go through restructuring. This restructuring costs the company money, time and other resources as expected from any restructuring. During this process, the company forms strong partnerships with a technology giant and a telecom giant, both of which give the company full backing. Also during this process, the company launches a product that gets overwhelmingly positive reviews from customers. Investing in this company's chances of returning to profitability is not speculating.
Let's take a time machine and look at some newspaper headlines regarding Ford from the second half of 2008 and first half of 2009. They will seem strikingly similar to today's headlines regarding Nokia.
Some may wonder why I give Ford as an example for Nokia as the two companies are in completely different industries. But they have much in common:
- 10 years ago, Nokia was often the brand that came to mind when someone mentioned "mobile phones" and Ford was often the brand that came to mind when someone mentioned "cars." Both companies had very strong brand names prior to entering into a deep crisis.
- Both companies had cash reserves, helping them cushion some of the hits they were taking. Ford's cash reserves saved it from a government bailout and Nokia's cash reserves are buying a few years for it to be able to complete its turnaround.
- Both companies saw their great brand name suffer as their finances were deteriorating. By 2008, everyone was talking about how Ford's products didn't meet customer needs anymore and how the company was far behind the competition. Now people say that Nokia is far behind the competition and its products don't keep costumer needs in mind.
- Both companies delivered high quality products while going through turnaround. Ford's products in 2009 and Nokia's current products (particularly Lumia 900) have been greatly welcomed by the customers. Interestingly, both companies signed partnerships with Microsoft (MSFT) during the process of turnaround.
- Both companies saw their bonds rated as "junk" during the process of turnaround. Ford's ratings have been upgraded very recently; however Nokia will have to wait a few years before that happens.
- Both companies lost about 90% of their market value during company turnaround.
Many people argue that Nokia is too late in the game as Apple and Android-based mobile device producers have already gained most of the smartphone market share in the world. This is obviously wrong, as the smartphone market is a very young market with a lot of growth potential remaining. In countries like China, and India, as well as continent of Africa, there are hundreds of millions of people who haven't been exposed to a smartphone at all.
Even if everyone in the world owned a smartphone, that would still leave room for more phones to be sold as the average lifetime of a mobile phone is a few years at best. Saying that Nokia is too late in the smartphone market to gain any significant market share is like saying "Apple (AAPL) is too late in making a TV as almost every household in the world already owns a TV."
Currently on Amazon (AMZN), Lumia 900 has 350 costumer reviews with average review having 5 stars. The phone received 308 five-stars, 20 four-stars and only 7 one-star. The reviews of the product are overwhelmingly positive. This reminds me of late 2009 when new Ford cars were launched and everyone was surprised and pleased at the same time with how much the cars of the company had improved in a matter of couple years. Today Ford is a cash cow and many don't question the company's success anymore.
I believe that Nokia will have a similar fate to Ford in the coming years.