Nokia (NOK) has plummeted for 3 months and suddenly shot up for seven days straight with the biggest gain it has seen in 20 years. When something like this happens, investors are going to take notice. It is important to look at the events that caused the stock to rise so dramatically and determine if these events can sustain the stock's growth. Why did it climb so fast?
Are Recent Gains Due To Sales?
One reason the shares may be due to sales. These gains follow a nice increase in sales as well as insider buying. It has risen almost 60% since its all time low in mid July. After it reported that sales from its Lumia smartphone beat estimates the stock headed up. Sales of the Lumia phone increased to 4 million units in the second quarter from more than 2 million in the previous period. Jean-Michel Salvador, an analyst at AlphaValue in Paris states:
"Perhaps this is the beginning of a recovery for Nokia. There is hope that sales might continue to grow also with the release of the new Windows phone."
Did the recent purchase of shares by Stephen Elop (CEO) -- who comes from Microsoft (MSFT) -- and several directors also help this push up? While the company cut 20,000 more jobs to help offset declining revenue, Elop bought 275,000 shares, raising his stake in Nokia to 425,000 shares, and Risto Siilasmaa, the company's new chairman, purchased 333,000 shares. Do you think this sign of commitment announces their confidence in Nokia as an independent business? Personally I am not sure of this. Even a takeover could raise the share of the stock and then they could turn around and be sold for a nice profit. And takeover bids have been rumored.
Maybe Its Because Of Takeover Rumors
Recently the stock rose 6% on rumors that the Korean giant Samsung (SSNLF.PK) was coming in to take over the company. And this is not the first time this rumor has surfaced. It was almost one year ago the same rumor hit the street. Back then Nokia was worth more: $24 billion but shares have dropped 40% in value since then. Samsung is in a perfect place to take the Finnish company over as its sales grow. Its Galaxy S III had 9 million in pre-order sales last month alone-not including U.S. and Canada. Did Samsung offer $4 euros per share for the Nokia stock as Swedish newspaper Dagens industri reports? If this is true, they want Nokia bad because it is 70% above trading price. But Samsung denies the rumors as untrue.
Another rumor floating around had Lenovo (LNVGF.PK) also interested in acquiring Nokia. What was their response? Gianfranco Lanci who is in charge of operations for Europe, the Middle East, and Africa stated: "This must be a joke!" Well, doesn't look like anything happening there!
If anyone should buy or take over Nokia, Microsoft should be the one to so it. The company would be a much better fit considering Nokia relies upon its mobile OS, Windows phone. Nokia developed the first Windows phone, the Nokia Lumia 900, and Microsoft would be able to boast of suddenly being able to produce its own hardware like Google (GOOG) and Apple (AAPL) do if it bought Nokia.
Microsoft Alliance That Makes Sense
Will developing smartphones for Windows Phone 8 put the company in a strong position? Some analysts really like the phone and say it is as good as any Android from Google or iPhone by Apple. If it becomes a strong competitor like some think it will, both companies (Nokia and Microsoft) might become strong players in the smartphone market. Nokia is in a risky position financially and being so dependent upon Microsoft for its success does not bode well for diversity. Even though the stock has risen, it is still a huge risk.
Nokia Does Have A Good Marketing Plan For The U.S.
In October 2011 Nokia sailed back into the smartphone market with the Lumia. Interestingly enough, its customers who had basic phones were the one's who gave the most feedback for the phone and this could be a good thing for Nokia in the future.
The company is targeting Americans who have yet to purchase their first smartphone -- currently around 50% of U.S. mobile users. The launch of the Lumia 800 Windows Phone made waves to start with and grew in popularity through January of 2012, but since then has declined even though the Lumia 900 was released in mid spring of this year. So smartphone users are losing interest but "feature phone" users are still positive on the company. Will this turn into a higher customer base? Can Nokia get these customers to buy its smartphone?
Nokia wants the Lumia Windows Phone in a position as a viable alternative to the likes to Apple and Android. Even though it only has a 3% market share, the phone could gain ground as more people become familiar with it -- if it is good. Nokia still owns 10% of the "feature phone" market and hopes to make inroads to the smartphone market through conversion. If you did not know, a feature phone describes any non-smartphone mobile device - cell phones without the internet, email and applications capabilities of smartphones. Perception of Nokia in this group of users is very high.
Keeping Nokia In Perspective
Whether to stock rose because sales turned out good and investors were reacting to get in at a time when the stock was so low, or if it was rumors that sent the stock up, a good investor must maintain a real perspective on where the company is presently. Sales plans are good, but number have to follow those plans. One good quarter is not going to make a company profitable long term.
Nokia will close all 43 of its stores in Russia while Samsung comes in opening 40 new stores to take up the void. It will also be closing offices in Germany and Canada while closing a plant in Finland. Nokia led sales of handsets in Russia but now Samsung will be able to that song. Nokia continues to shrink while Samsung grows.
However one looks at Nokia, we must understand the reality of where the company is right now. It already has a junk status rating by the three biggest rating companies. Moody's Investors Service but it two steps further in account of mounting losses. The cut is three levels below "investment grade." The company reported a wider second-quarter loss and said its handset business probably won't be any closer to profitability this quarter. Wolfgang Draack, a Moody's analyst says:
"Nokia's transition in the smartphone business will cause deeper operating losses and consequently cash consumption in the coming quarters than we had previously assumed."
Wherever the stock is headed, it is important to keep reality in perspective. The company is a high risk investment right now. I still would not put too much faith in it long term.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.