Investors Are Realizing That Nokia Is Here To Stay

| About: Nokia Corporation (NOK)
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In the past few months, I've mentioned in a number of articles that a possible bankruptcy is already priced in for Nokia (NYSE:NOK) as the company's market value is far below the value of the company's patent portfolio alone. Any positive news or hint regarding Nokia's survivability would be bullish for the stock. After bottoming at $1.71, Nokia is now up to $2.11 per share. Of course, the recent rally in the European stocks as a result of Draghi's comment played an important role in this, but I also believe that investors are starting to get comfortable with the idea that Nokia is here to stay.

Nokia's cost-cutting efforts have accelerated recently. The company has announced that it would lay-off personnel from the research and development department in China as part of 10,000 lay-offs announced earlier, close down its final plant in Finland, and scrap its Meltemi operating system project, which was originally developed to compete with Google's (NASDAQ:GOOG) Android system.

The company's existence in Finland will be limited to its headquarters. The company will cost another 3,700 jobs in Finland. As the company moved its operations and workforce out of Finland, the country announced that it would not save Nokia in case of a bankruptcy. After all, I don't blame the Finnish government; why would they want to save a company that ships jobs away. On the other hand, I don't blame Nokia either, as the company is simply trying to cut costs to survive. I don't know Finnish laws regarding acquisitions; however, the company might end up moving its headquarters elsewhere in case it needs to be bailed out by Microsoft (NASDAQ:MSFT) or another company.

Nokia has always been known for producing high-quality phones that can last for many years. After moving its plants from Europe to Asia, it will be interesting to see whether Nokia's phone quality declines. Many argue that Nokia should bring down endurance of its phones by a couple notches. If Nokia's phones survive a long time, the users of Nokia phones will not spend as much money on replacing their phones as those companies whose phones don't last nearly as long as Nokia's phones. Besides, because new phone models come out every few months, it may not be a good idea to spend a lot of money to build a phone that can possibly last 5-6 years.

Meltemi operating system was going to replace Series 40 operating system, which sold 1.5 billion copies since its introduction in 1999. This operating system was for the "mid-range" phones, the class of phones right below the smartphone category. Nokia never officially announced having worked on Meltemi; however, it was highly expected by those that know the company.

All these cost cutting measures will ironically increase the costs in the short term. Nokia will have some one-time charges related to these measures in the next couple of quarters. In the long term, the company hopes to save over $1 billion per year from these actions. In the last quarter, the company's cash flow was almost unchanged, excluding the dividend payments it made. If the company's operating revenue stays flat year on year, cutting $1 billion per year from costs can be the key to return Nokia to profitability.

If the cost cutting measures do not work good enough, in other words if Nokia's revenue drop is sharper than its cost cutting, the company might end up slashing more jobs and closing more facilities in order to return to profitability. So far, the company's CEO Steve Elop has been very serious and aggressive about cutting costs to make Nokia profitable again.

On a side note, rumor has it that Nokia's first phones running on Windows 8 might hit the market by as early as September. Nothing is confirmed by the company yet.

I continue to be bullish on Nokia due to its deep valuation. At this point, anything short of bankruptcy is bullish for the company as many investors are almost certain that the company will not be around for more than a couple of years. If the company convinces more investors that it is here to stay, the upside potential will be huge.

Disclosure: I am long NOK, GOOG, MSFT.