Nokia (NOK) started today with the news that it is cutting 10,000 jobs by the end of 2013 and increased its loss guidance for the second quarter. The stock is down to $2.34/share or about 16% on the news.
Sadly, this has become a familiar story for Nokia over the last year or so, as the company continues to lose its market share in the handsets to Apple, Samsung and other mobile device makers. The story is being played out similar to Ericsson. Ultimately, Ericsson joined forces with Sony. The problem with merging two weak businesses is, that the result will still be weak and so it panned out for Sony-Ericsson. What then is in Nokia’s future?
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The Stock is Cheap
At the current market prices, the stock is trading at 60% of the book value and 1.36 times the tangible book value. The company is valued in the market at about $9 Billion and has $13 Billion in cash and marketable securities on the books. From a balance sheet perspective, if the company closes its factories and disposes off assets, it will raise more cash (although it remains to be seen if they can fetch prices above the book). At 1.4, the current ratio seems a bit inadequate, but when the sales are declining steadily, the operating liquidity is not really a problem.
Essentially, the company is in no immediate danger of going bankrupt and has valuable assets.
The Problem with Nokia
The problem with Nokia is mainly on the margins. Its sales have declined around 30% from 2007 and the costs have not gone down proportionally. Increasing competition also means their gross margins have been trimmed down to 33% for what used to be as high as 45% in mid 2000s. The margin pressures have become more pronounced as the competition has intensified and the pricing power for Nokia has decreased.
Platforms and Networks
For an incumbent like Nokia, it feels a bit strange to talk about barriers to entry. Perhaps a better phrase would be the cost of acquisition of a new customer, however, most of the customers that they need to win back are the ones they used to have in the past. iPhone and Android ecosystem has grown rapidly and captured a significant market that is difficult to penetrate as the customers typically have high costs of switching as they get used to the apps and the features that these platforms provide. The barrier becomes stronger as these networks grow. It is unfortunate that Nokia’s Symbian system did not adapt to the changing Smartphone landscape, despite being a much earlier player in the space.
The Way Out
Nokia still possesses a formidable hardware capability. It just needs a push in regaining market share to become profitable again. Aligning with one of the emerging competitors in the Smartphone OS market may be one of the ways to get there. Microsoft for example, is making a serious push with its Windows Phone and they have already invested in Nokia, so a deeper strategic partnership is not out of the question (including an outright acquisition of Nokia). Another company that is hoping to leverage its existing network and launching a Smartphone is Facebook.
The stock is cheap and the assets are valuable. Some believe that its patents by themselves are worth $2.3/share. Unless Nokia aligns itself with one of the emerging players that has the marketing muscle or existing network to take on the iPhone/Android user base, it will continue to be difficult for Nokia to compete. This way they can also leverage some of their existing capabilities in the OS development. The other option is to become a pure play hardware supplier and hop on to Android bandwagon
I will mark the stock down as a good buy at the current prices, but a little on the speculative side.