Nokia Corporation (NOK) shareholders are waiting for Godot. To pass the time, Nokia investors will engage themselves with cordial banter, product reviews, and expectations of dividend checks. In this case, Godot is the blockbuster Nokia product that never shows up. To that end, Nokia investors cling desperately to a toxic bag of assets destined for zero, bankruptcy, and reorganization. Today, the Nokia brand name is dismissed as being a 90s relic.
For mere survival, Nokia is reliant upon its Microsoft (MSFT) partnership to carve out territory within an entrenched smart phone oligarchy. Without a flagship product, Nokia executives will be forced to buy time through financial engineering. Rather than holding out hope, conservative investors should sell stock now and avoid repeating the comical irony of Samuel Beckett's 1953 play.
The Consumer Electronics Ecosystem
The powerful "I am a Mac and I am a PC" advertising campaign crystallizes the make up of today's smart phone and consumer electronics market, at-large. In a series of advertisements, Apple (AAPL) personifies itself as a chic, yet functionally eager to please hipster. Alternatively, Microsoft is the dowdy company man in a tweed suit who cannot get out of his own way. These commercials further reinforce Apple's image as being "cool."
On Wall Street, the Apple brand is worth several billions of dollars in goodwill and intangible assets. Apple's goodwill halo effect extends over a consumer electronics ecosystem that includes the iPod, iTunes, iMac, iPhone, and iPad platforms. For its fourth fiscal quarterly period ended September 29, Apple reports sales of 27 million iPhone units as part of $36 billion in revenue and $8.2 billion in net income.
Outsize revenue and profits, of course, attract competition. Today, the Google Android ecosystem functions as Apple's most formidable challenger. An October 2 comScore report estimates that Google Android and Apple iOS systems operate 53% and 34% of the smart phone market, respectively. Meanwhile, Samsung and Apple are a respective first and third on the handset ledger.
The Apple iOS - Google Android oligarchy is actually gaining strength, as evidenced by a collective 4.1% increase in share over the prior quarter. With Samsung effectively serving as Google proxy, Apple's spate of patent infringement lawsuits showcase an increasingly commoditized and competitive smart phone marketplace.
At the bottom of the heap, Research In Motion (RIMM) Blackberry, Nokia Symbian, and Microsoft Windows desperately claw over a shrinking 13% share of the smart phone market. Last year, Nokia and Microsoft announced a $1 billion partnership to share handset equipment and software.
Ironically, this deal would have never come to fruition during the 90s hey day when the Department of Justice threatened to deconstruct an alleged Microsoft monopoly. Today, Ed Burnette and ZD Net dismiss Microsoft and Nokia negotiations as a "desperate alliance."
While Nokia remains effectively married to Microsoft, Redmond executives have quietly accepted offers to supply Windows software for Samsung and Huawei Technologies handsets.
Nokia Lumia 920 Windows 8 Phone
PC Magazine contributor, Dan Costa describes Windows 8 as a "huge gamble" for Microsoft. Microsoft's latest software platform represents a fusion of traditional smart phone, personal computer, and tablet interfaces. For example, Windows 8 users now have the option of executing desktop commands through touch screen technology, before picking up a Nokia Lumia 920 phone and running Excel calculations.
Despite tepid praise for Windows 8, Microsoft will still maintain its triple-A credit rating as a cash-rich, utilitarian business. Nokia, however, is doomed to bankruptcy, when Windows 8 falls short of a blockbuster event. As a standalone entity, the Lumia 920 does not feature the adequate specifications, nor does it offer the nominal pricing value, to effectively compete against premium Apple iPhone and Samsung Galaxy SIII handsets.
Nokia markets its Lumia 920 as a fun phone "designed to wow" that is available in five separate colors. Weighing in at 185 grams, this phone features a short and stocky profile similar to the old Apple iPhone 4. Lumia 920 physical specifications are somewhat dated, when juxtaposed against the vertically elongated rectangular look of the iPhone 5 and Samsung Galaxy.
Nokia's Windows 8 phone is also notable for the functionality of its mapping application alongside the clarity of digital photographs taken with an 8.7-megapixel camera. The Nokia Lumia 920 is set for Holiday Season launch, and reports out of Europe indicate that this unlocked smart phone will retail for between $700 and $850.
Wall Street has not been impressed. On September 5, Nokia hosted a demonstration for the Lumia 920 in New York City. That very same day, traders frantically sold off Nokia stock towards a 15% loss.
The Bottom Line
If anything, Nokia's looming Lumia 920 launch will prove to be a repeat of the Lumia 900 event. Last April, rapper Nicki Minaj danced the night away at a Times Square concert as Nokia's latest pitchwoman, while Jeff Bradley, AT&T (T) executive, boasted that the Lumia 900 would be a "notch above anything [the carrier has] ever done."
During this first month of product launch, Nokia offered $100 rebates as compensation for Lumia 900 technical glitches. Despite effectively giving these phones away amid a Nokia, AT&T, and Microsoft marketing blitz, Stephen Elop, Nokia CEO, describes Lumia 900 sales as "mixed." Within its recent third quarterly period report, released October 18, Nokia reports staggering 50% year-over-year declines in smart phone sales.
Last year, Nokia maintained a $47 billion balance sheet. After a steady deterioration in business, Nokia now operates with a shrinking Q3 2012 $38.5 billion balance sheet. Broken down further, Nokia carries $12.8 billion in cash and investments above $6.9 billion in financial liabilities.
Nokia's balance sheet also includes $7.3 billion in goodwill and intangible assets. To survive, Nokia must effectively "float the note" through financial engineering, until its technicians introduce a blockbuster product to market. Again, Nokia investors are waiting for a Godot release that will never materialize.
Google recently closed on its $12.5 billion acquisition of Motorola, largely for patents. With this deal, Google telegraphs its willingness to proactively defend its share of the Android portfolio against litigation. For investors, the deafening silence towards Nokia's patent portfolio from major players, may serve as evidence that the $7.3 billion in goodwill and intangible assets must be written down. Assets that cannot be leveraged for profit quickly depreciate towards zero.
Last quarter, Nokia battled through $555 million and $1.3 billion declines in operating cash flow and cash equivalent position, respectively. For the year, Nokia has lost $2 billion off its cash and cash equivalent line item. If this trajectory continues, Nokia will declare bankruptcy within the next twenty-four months, and sell off service, handset, intellectual property, and fixed asset units at fire sale prices.
To postpone the inevitable, Nokia must eliminate its dividend in conjunction with debt refinancing. These moves would preserve roughly $1.5 billion in cash flow over the next 18 months. Financial engineering alone, of course, is never enough to safeguard a flawed business model over the long term.
At $2.57, Nokia stock is effectively a call option. Nokia's risk versus reward profile, however, is far from favorable, and conservative investors should immediately sell off stock.
Disclosure: I am long AAPL.