Nokia Corporation (NOK) appears to fall deeper into trouble each day, and I do not think it can handle any more negative press. It may struggle to survive with or without any additional setbacks. I do not believe Nokia has a bright future, and I do not recommend investing in it, even though it is taking certain measures to let its business thrive.
In a struggling economy, Nokia has struggled to execute its profitable business strategies. One potentially profitable deal, however, is its partnership with Zynga (ZNGA). This partnership will bring Zynga's popular games to the Nokia Lumia smartphone and Windows smartphones. Zynga's games are most commonly played on Facebook's (FB) social networking site at the moment. While this partnership has some potential to be profitable for Nokia, it will most likely benefit Microsoft Corporation (MSFT) much more.
Microsoft is making a huge push in the smartphones market, which will allow this Zynga partnership to be even more profitable. A recent International Data Corporation study found that Microsoft's Windows Phone will eventually catch up with Apple Inc.'s (AAPL) iPhone. The Windows phone is a joint project that uses Microsoft's software operating system and Nokia's physical handsets, and it currently has only 5% of the market. This may be changing over time, however, as both the iPhone and Windows phones are expected to have 19% of the global smartphones market by 2016.
While that sounds great for Nokia, all may not be as it appears. Microsoft's recent launch of Windows Phone 8 came with news that this operating software will not be made available for existing Windows Phone 7 devices. Most notably for Nokia, this means that its new series of Lumia smartphones will not be compatible with Windows 8 software. While an update called Win Phone 7.8 will become available for these devices, this is still terrible news for Nokia. There will be essentially no reason for consumers to buy a Nokia Lumia in the near future, as it will be obsolete.
In response to this news, Nokia slashed its projected sales for 2013 by 41%. Nokia's Chief Executive Officer, Stephen Elop, had abandoned Nokia's Symbian operating system, counting on the success of its Microsoft partnership. This all goes to show how horrible this development is for Nokia and its investors.
Microsoft must now decide which direction it will go in the production of its new Windows Phone 8 device. One option would be for Nokia to produce a new handset that will be compatible once again. If this were the planned route of production, however, I would have expected Microsoft to make the Windows 8 operating system compatible with Nokia's Lumia phones. With this in mind, I think Microsoft is trying to make a break from the struggling handset provider.
It seems more likely that Microsoft will go around Nokia to build its own smartphone. This will allow Microsoft to further break its ties with the financially unstable company. I find this a more likely scenario, as Microsoft is slowly turning into a hardware and software company with its plans to produce its own tablet device.
If Microsoft chooses to develop its own smartphone handset, I believe Nokia will be in dire trouble. Unless one of two things happens, I think investors need to stay away from Nokia:
The first thing that could change my mind would be if Microsoft allows Nokia to develop the hardware that is compatible with the Windows Phone 8 software. This would allow Nokia to regain its expected loss sales, and the company may even be able to increase revenue. As I said earlier, this seems unlikely, but it is a possibility.
The other thing that could change my mind would be if the rumors of a buyout become more prevalent. If talks of a buyout become more widespread, I expect Nokia stock to increase significantly. Once the buyout takes place, or is certain to happen, I would sell any Nokia stock, taking whatever gain I can muster from the struggling company. Unfortunately for Nokia, a buyout is not a guarantee at the moment. Based on the rumors, Microsoft and Samsung are the two companies that are interested. Investors should watch out for future developments with these rumors.
Prior to this week's announcement of the Windows Phone 8 and Windows Surface Tablet, it seemed like an obvious move for Microsoft to acquire Nokia. Instead of paying it for each Nokia handset sold with Windows software, Microsoft could have bought out Nokia. This would have been beneficial for both companies, as it would relieve Nokia from its financial insecurities, and it would allow Microsoft to expand its smartphones production. Along with the moves to break away from Nokia, however, Microsoft has reported it has no intentions to purchase Nokia. This makes the rumor about a buyout seem unlikely at the moment.
As I mentioned, rumors have also linked Samsung to a deal to acquire Nokia. I do not see any reason why Samsung should spend billions of dollars to acquire Nokia though. It recently passed Nokia to become the largest producer of smartphone handsets in the world. As far as I can tell, Samsung does not need Nokia's business, as it already produces smartphones to run the very popular Android operating system. By acquiring Nokia, Samsung would essentially be spending billions of dollars to absolve Nokia of its financial troubles.
I simply cannot recommend investing in this company. Nokia's biggest partner, Microsoft, seems to be pulling away from Nokia, leaving it to cut its sales estimates by dangerous amounts. I do not expect Nokia to lead the way in producing the next handset for Microsoft's Windows Phone 8, and none of the companies that were interested in acquiring Nokia still seem interested. As a result, I expect Nokia to continue to struggle, lack growth, and fail to increase its stock price.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.