Nokia's Red Flags Could Tank Stock

Jun.18.12 | About: Nokia Corporation (NOK)

There have been some recent news stories about Nokia (NYSE:NOK) that have placed the company in favorable light. Nokia is currently trading at a very low price, so it would likely be a good investment for the time being. In the long term, I do not anticipate great things for Nokia or its stock.

Nokia is currently getting battered in the smartphone market by Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG). This was highlighted when the company recently issued its third profit warning for the year on worse-than-expected losses. Nokia also plans to cut 10,000 jobs in its mobile division by the end of 2013. Nokia's inability to keep up with rapidly changing technology is really starting to take a toll on its long-term viability.

Nokia has also been in the news for updates to its lower-end phones, which now appear much more similar to smartphones. At least one analyst considers this a good move for the company, but acknowledged that it is not a solution to its problems as a whole. I think this will be quite minor in the long run, as people are often "shunning basic Nokia phones and turning to cheap smartphones." Over time, non-smartphones will become increasingly pointless. I predict that the positive publicity for this update will be short-lived. It may have a temporarily positive impact on Nokia stock, but that is all.

Another analyst also notes that the new features for these lower-end phones may not be large enough improvements. As a result, he claims that this appears more like a short-term fix. The positive news stories are already meeting some skepticism. Even in terms of how the company appears to the public, therefore, this event may be quite inconsequential.

In the smartphone market, Nokia does not have the most promising future either. Its Lumia 900 helps it compete, but it only holds limited potential for success. Nokia's share in the smartphone market fell significantly in the first quarter, and the Lumia 900 may have too small of a gross margin for it to significantly benefit the company. The Lumia 900 only has a gross margin of 53.5%, while the Apple iPhone 4S has a gross margin of 70.7%. The popularity of cheaper smartphones is good for the company, but its profit will be limited due to the expensive costs of manufacturing the phone.

Nokia is continuing to improve the Lumia 900, but it must do so by releasing firmware updates that fix unfortunate bugs that should have never existed in the first place. Its recent update will fix the purple tint in low light settings, and it will improve the sensitivity of its proximity sensor. This is great news, but it is also alarming that these problems existed in the first place. The phone costs more to manufacture than Apple's iPhone 4S, but there are still problems like a purple tint. Nokia has demonstrated good customer service through this update, but it also keeps the Lumia 900 from appearing like a quality product. It does not look like the company will be taking a significant portion of the smartphone market anytime soon, so the long-term future of Nokia is questionable.

One major thing is still helping Nokia appear to be a good investment - Nokia stock is cheap. One writer even calls it "ridiculously cheap," as its trading value is only about half the value of its total assets. Furthermore, Rovio has agreed to make new games that will be exclusive to the Lumia phones. Electronic Arts (NASDAQ:EA) will also develop games, so there is some reason to have faith in Lumia smartphones. Once again, I think this is quite minor and will only have a limited impact. I agree that the price is currently cheap, so this would be a good time to invest. As a long-term investment, however, I do not see much promise in Nokia.

Google may also cause problems, as it is taking legal action against Nokia and Microsoft (NASDAQ:MSFT). Google claims that the two companies are "using patents to spoil rivalry," so it filed an antitrust complaint against them with the European Commission. Microsoft is strong enough of a company that this will not have a huge effect on it, but Nokia does not need more problems to deal with. This is rather minor, but it is just one more issue harming the company's reputation.

Nokia is not the only one struggling to keep up in the smartphone market though. Research In Motion (RIMM) is still working to recover after losing a huge portion of its share in the smartphone market over the last two years. It lost 75% of its market value in the past year, and it recently told investors that it expects to have an operating loss in the present quarter. As a result, the company is looking to restructure. This does not mean the end of the company. It does create uncertainty from investors, however, which will have a negative impact on the stock. People with an interest in the company should pay close attention to its restructuring as things develop.

Google's newly acquired Motorola is releasing a new low-end Android smartphone. As noted earlier in the article, these cheaper smartphones are becoming more popular, so this could bring positive results for the company. Motorola may not be as big of a player as other companies, but it does allow Google to continue taking a portion of the smartphone market while continuing to develop in other areas. This will have a very minor impact on Google stock, but it will certainly be positive.

In terms of becoming a strong, competitive company, Nokia does not seem promising. Research In Motion may be struggling as well, but Nokia has lost a significant part of its market share and has not taken strong enough actions to turn this around. I do agree that the stock is particularly cheap and has potential for investors to make money as it rebounds. This may be a little risky, however, and without great changes, I do not foresee the company becoming as strong as it once was.

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