As technology moves from one generation to the next, the old champions are frequently left behind with only fading memories of former glories. That has certainly proved to be the case with Nokia (NYSE:NOK), as this one-time growth champion has become a lagging dotard in the cellphone market that it still, somehow, leads. With new management and a new operating philosophy in place, including a far-reaching partnership with Microsoft (Nasdaq:MSFT), it is time to reconsider the investment case for Nokia.
Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.
The Problems Have Been Many
Although much is made of Apple (Nasdaq:AAPL), burying Nokia under the avalanche prompted by the iPhone, the fact is that Nokia was struggling long before that. Consider any recent innovation (going back to the clamshell design), and Nokia was almost always one of the last to be on board and usually not a good representation of the breed. In fact, Nokia couldn't even stay ahead of the likes of Research In Motion (Nasdaq:RIMM) or Palm as the cell phone world changed.
Along the way were manifold mistakes, missteps and mismanagement. Billions spent on deals for the likes of Intellisync, Navteq and OZ Communications have arguably added no value for shareholders, while products like the N-Gage may well hold a place among the worst ever brought to market.
Suffice it to say, then, there is no great surprise in the news that Nokia has lost considerable shares to Apple, Google (Nasdaq:GOOG) and Android phone makers like Samsung and HTC. In fact, it may actually be more surprising that Nokia still has the top spot - though the company owes a lot of this to its position in low-end phones in non-U.S. markets. (For related reading, see Why Do Companies Care About Their Stock Prices?)
The New Nokia
After several fits and starts, Nokia is on a new path. Stephen Elop has come in as CEO and has not been shy about trying to change how Nokia does things, all the while trying to preserve the things that Nokia legitimately does well.
The key to these efforts is the company's partnership with Microsoft to develop phones for the Windows Phone operating system. While revenue fell 13% in the latest quarter and smartphone unit shipments plummeted 38%, the first fruits of this partnership are now on the market in Europe - the Lumia 710 and 800.
Although reviewers are not hailing Lumia as an Apple-corer, the reviews have generally been rather positive and suggest it is a very worthy player in the smartphone field; particularly among those customers who are disinclined to pay any price just to have an Apple phone in their pocket. With the new phones due to hit the market in the first quarter of 2012, investors will get the first glimpse of whether or not Nokia can regain lost momentum. That said, these Lumia phones are arguably not the best that the company can do (they were designed in about six months), so success here could be a strong starting point.
Better on Balance, but Better Enough?
Nokia seems to be getting smarter. Although the Lumia may be a bit of rush job, it's not embarrassingly so - management seems to have abandoned the quick-and-easy shortcut approach to competing with superior phones. Likewise, management seems focused on patching other leaks - a restructuring of its Nokia-Siemens joint venture with Siemens (NYSE:SI) may not be a dire threat to Alcatel Lucent (NYSE:ALU) or Ericsson (Nasdaq:ERIC), but it should be less of an anchor around the company's ankles.
The biggest question is whether the company can reestablish profitable momentum. On the plus side, the Lumias looks legitimately competitive and suggests Nokia has gotten with the program in terms of design and features. On the other hand, margins are problematic and for now it looks as though these Windows phones will be less profitable. What's more, the question is very much in the air as to whether Nokia will recapture shares from the likes of Samsung or HTC (or perhaps Apple,) or whether it will simply allow the company to hold on to what it has left.
The Bottom Line
If you assume that Nokia will founder for a couple of more years and then post market-matching revenue growth along with margins only about 80% of prior levels, then the stock is still likely under-priced by more than 30%. Said differently, the market is pricing in further gradual erosion towards irrelevance, despite a very good global distribution system and a design capability that is at least competent. (Find out how to put this important component of equity analysis to work for you. For more, see Analyzing Operating Margins.)
With Europe continuing to melt down and investors in a generally risk-averse mood, buying Nokia takes quite a lot of bravery today. At a minimum, it will take a successful launch of the Lumia to get this stock working right again, but investors who are confident that this once-king can also be among the future's royalty could be looking at significant multi-year upside.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.
Mutual Funds & ETFsLearn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
Investing NewsWill Ferrari's shares move fast off the line only to sputter later?
Stock AnalysisHere are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
InvestingThe further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
Fundamental AnalysisOptions market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
Stock AnalysisCan these two oil stocks buck the trend?
Investing NewsAlcoa plans to split into two companies. Is this a bullish catalyst for investors?
EconomicsDiscover the four countries in the world that manufacture the largest amount of chocolate and learn basic facts about the chocolate industry.
Stock AnalysisIf you want to buck the bear market trend by going long on consumer stocks, these three might be your best bets.
Investing NewsA rate hike would certainly alter the investment scene, but would it be for the better or worse?
When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>