Nokia And RIM: The Next To Go?

| About: Nokia Corporation (NOK)
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Nokia (NYSE:NOK) is the number two company behind Samsung (OTC:SSNLF) for mobile device sales world-wide. Apple (NASDAQ:AAPL) is in third place but gaining quickly with the sale of iPhones and iPads. Nokia was once the greatest innovator but has been replaced by manufacturers who have embraced the smart phone and mobile device market with improved functionality and a host of offerings that don't stop at being a phone. There seems to be no end in sight for the Nokia decline, unless of course we consider the buzz that Nokia may be in play as an acquisition target.

Recent speculation that Samsung will bid for Nokia shares sent Nokia stock over $3 on June 8. Nokia's book value per share is $3.69. Nokia has total debt of $6.19 billion and total cash of $12.66 billion. The stock has a 52-week range of $2.61 to $7.38. The price earnings are negative ($0.83), and the company currently pays a dividend of 6.10%.

Nokia's first quarter 2012 numbers showed that the company's operating margins experienced declines and were expected to be negative 3% for the remainder of the year. The company increased its investment in the Lumia 900 Windows phone and sold over two million of the handsets in the first quarter. Its partnership with Microsoft on the Lumia 900 is being supported through AT&T in the U.S. Nokia has partnered with China Telecom (NYSE:CHA) to sell its Lumia 900 in Asia.

The Executive Vice President of Nokia's Mobile Phones Unit, Mary McDowell, has said that the company's strategy in the feature phone business is to offer the best possible phone - at a price below the least expensive Android phones on the market. Nokia is not saying how it intends to directly compete against smart phones at the low end of the market. The company previously targeted its Symbian operating system toward the lower end of the market, but it is now losing ground to better priced smart phones that have all the bells and whistles included. Ms. McDowell acknowledges that the price of smart phones is decreasing, and is having a very negative impact on the top line of Nokia's business. This is particularly true in China and India, where unbranded entry level mobile phones are providing growth to the mobile markets. The price of smart phones is expected to decline in the future as a result of improved hardware, software and chip innovations. The development of high speed networks will create further demand in emerging economies once those services become available.

The number of phones Nokia shipped in the first quarter of 2012 decreased 24% from the same period in 2011. Nokia has three phones priced above $125, compared to nine last year. Nokia's least expensive smart phone is the Lumia 610, priced at $236. Nokia is working on a product line named Meltemi (Linux-based phones) that will compete at the lower end of the smart phone market. The company recently announced two new members of the Asha Touch family of mobile devices to add to its existing Asha portfolio, which was introduced back in October 2011. The new products offer a new touch user interface, better consumption costs, and a longer battery life. It is marketed to young social consumers as an attractive lifestyle enhancement tool. The offering is the most affordable WiFi handset to date, ranging between $115 and $120.

It is impossible not to include Research In Motion (RIMM) into this conversation. In one of the most spectacular examples of mismanagement, inability to read the competitive landscape, and a complete lack of any sense of how to market products effectively, RIM shines as an example of how to mess up a good thing. RIM is one of those stories that will likely begin with "it was an innovator ahead of its time" and end with "but management just couldn't hold on to or increase the market share." It is a company that was run by an autocratic and out of touch management team who had the arrogance to think that because the product was superior, that would be enough for the Blackberry to conquer the world.

Imitators and competitors started making faster, better, and cheaper options, and the company's shares as well as any investor confidence now dwell in the basement. The company is hanging hope on a change of management to lift the company's fortunes. Unless RIM finds a way to market its existing product line and come up with new and improved products, it will end up like another great Canadian innovator, Nortel Networks. The bright spot on RIM's horizon is it has $1.77 billion in cash and no debt. The book value per share is $19.59, which gives it an approximate current value of $4 billion. The price earnings ratio is 4.90, the earnings per share are $2.22. RIM does not currently pay a dividend.

Some speculate that Nokia's value of $11 billion makes it an expensive acquisition, even for Microsoft (NASDAQ:MSFT), a rumored bidder. Microsoft is looking for a way to innovate and re-gain some lost momentum. Even with a company as well capitalized as Microsoft, an $11 billion price tag is steep. It does make sense that Microsoft would look into some kind of acquisition, as Nokia is using Microsoft's platform to drive the Lumia 900. Samsung is not a potential acquirer, as it uses Google (NASDAQ:GOOG) to drive its best selling tablets and smart phones.

Rumors of a takeover are not helping RIM trade above its book value either. RIM is frequently rumored to be a takeover target as well, as companies from Apple to AT&T (NYSE:T) are whispered to be looking at the takeover. It would be fair to say that the competitive landscape for handset manufacturers is saturated to the point of not being able to gain any meaningful traction to drive the industry and its products forward. There is too much competition on the low end of the spectrum, and there is little room for players who can't service market needs on a timely basis. The lack of enthusiasm for any kind of merger and acquisition activity is demonstrating that investors and industry leaders alike are patiently waiting for a new curve of innovation to drive interest for the sector.

I don't think that either of these companies will be bought by another company in the same space. Nokia has demonstrated that it has lost touch with its constituents in the last two years, but it has an arsenal of intellectual property which makes these properties individually attractive.

New management has very little time to implement a disaster recovery plan, as investors have seemingly lost all patience and faith in RIM. Unless something really good comes out of RIM, really soon, it will be another crater on the smart phone landscape. Similarly, Nokia needs a better marketing strategy. Nokia is the winner in the business strategy competition, as it is making efforts to service the low end of the handset market and offer similar features for a better price. The key to which of these companies will succeed is the ability of current management to get these companies back on track.

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