Nokia… Back from the Brink?

I don’t believe that I can predict market swings and price fluctuations with success.  Thus I don’t attempt to.  My main stock investing philosophy is to find a solid firm that is bargain priced, make sure it isn’t on a permanent downward slope, and invest with confidence that the price will likely go back up where it belongs, leaving me with a great profit and little risk.  You may or may not agree but I think that Nokia Corporation (NOK) fits into this category.

Nokia is the number one provider of handsets worldwide with 36% of the global market.  This gives them a solid base from which to build.  They have been sliding back for the last few years, both in market share and profitability but CEO Stephen Elop has already started aggressive plans to change that.

It’s true that some of Nokia’s financials are a little disconcerting.  It has an operating loss last year of $1.4 billion compared to a $2 billion profit in 2010.  While that alone may turn away some investors, you cannot ignore their P/E of around 13 compared to an industry average around 25, their dividend of 5%, and the book value plus cash of over $8 for a stock trading for $5.  With the huge amount of cash the NOK has one year in the red won’t do much damage – the test will be whether or not they put 2012’s net income in the black.

There are a few areas where Nokia has promise.  The main is its recent partnership with Microsoft (MSFT) which will have Nokia running both its new smartphones and tablets on Windows 8.  Windows 8 has not been amazingly popular but hey it is still in beta and a great deal of people who run Windows aren’t going to run out and get a beta release.  They wait until it is safe and then move over.  While that is true there is also a huge percentage of the public that is comfortable with Microsoft and Windows and may favor a Windows phone over an unfamiliar operating system.  Another area where they may have strength is that Apple isn’t big in a lot of corporate circles; Nokia phones and tablets running Windows 8 compatible with all the other Windows computers on corporate networks could provide a large market for Nokia.

Another area of hope is that Nokia is huge overseas and sells a great deal of basic handsets (read: dumbphones) in emerging markets and this provides a lot of the reason it is still has the largest market share globally.  The problems here are that this is not a high margin sector of the market and smartphones are beginning to cut into this sector.  Despite these pitfalls because Nokia is often the best known phone provider in these areas it can grow with the smartphone revolution as it has a number of lower-end smartphones in the works.

The third reason I’ll present is the Microsoft is huge and successful, Nokia is giant and has one of the best distribution networks in the world.  They have the resources to change the game.  As long as things stay on schedule Windows 8 will be out before the year’s end and if Nokia can have some of its devices out before the holiday season then the battle will begin.

Nokia seems to be turning itself around, and while a huge company like itself cannot turn on a dime, I think that it is sailing in the right direction.  Maybe it won’t be there in the next 1-3 months but in the next 12-24 it is possible and we may have a real competitor in the tablet and handset market.  Right now, at $5, this may be the best time to jump on the ship.  So it is for you to decide if you are comfortable with it.  In my opinion this is a low risk situation where Nokia has enough cash on hand that it can’t go down much further, you can get a solid dividend, and there is a large potential upside. But there is no reason to invest in a stock simply because you don’t think it will go down.

For me it comes down to whether or not the Windows Phone will be successful.  Android and Apple dominate the market right now and though I don’t have any dreams that Nokia will bring either of them down in the next few years it could have a shot at the #3 spot and that could be worth a whole lot to the Finnish company and could mean a lot of profit to the stockholders who got in at $5.  So there you have it.  Do some more research if you’re interested and invest wisely!

Patrick Gray


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