Is Nokia Down or Bound to Turnaround?

I recommended Nokia (NYSE: NOK) as a solid buy a month ago – in the time since then it is down 25%.  Am I backing out on that recommendation?  Definitely not.  The stock has been down mainly due to last quarter’s earnings reports as they landed below the estimates.  Does this mean the company is fundamentally weaker than it was a month ago?  I don’t think so.  Nokia knew that its lineup of phones was falling behind other companies: Apple (NASDAQ:AAPL) and then Motorola (NYSE: MMI) and the rest of the Android Gang on the high end, and Chinese mass produced dumbphones on the lower end.  They knew that their margins were falling and their profit was dropping with it.  That is old news – but it is only now that Wall Street is reacting fully to it. I would not recommend investing in this stock if that was still the case but the company is changing course.  Now we have that cleared up, why it is that I recommended Nokia in the first place?

I had three main points in my previous article and here they are summarized.  The company is huge and still the worldwide leader in market share.  As such, they have a massive base of experience and personnel to draw on and distribution networks all over the globe.  They have recently announced that they’ve gone all in with Microsoft on the new Windows Phone and Microsoft (NASDAQ: MSFT) has said that they have a special relationship with Nokia.  CEO Stephen Elop has already initiated a number of measures to revive the company and make it a leaner operation focusing on their core operations as a handset maker.  As proof they ditched Symbian and have cut costs by automating more jobs and moving the rest to Asia.  As a kicker and something I didn’t mention explicitly in my previous article Nokia has $4.02 in cash per share.  In case you haven’t already checked the stock is worth $4.07 as of this morning… you can get the massive corporation of Nokia with a number of great phones in the pipeline for $.07?  Count me in.

So that’s why I recommended the company a month ago.  Now let’s see what has changed.  The Q1 stats came out and revenue was down 35%.  This knocked down the stock but is this really such a surprise?  Who wants to buy a Symbian phone when Nokia said they are ending the OS?  But of course the emotional and sometimes irrational Wall Street is going to bring the stock price down and this seems to me like a great time to buy in.  The new products and organizational changes won’t affect the bottom line for another 3-6 months.  Now admittedly there were a few slip ups.  Nokia released their prized new Windows Phone, the Lumia 900, on Easter Sunday (not sure who decided that) and then there was a slight bug in the operating system but that was fixed within two days and all users affected by it got full refunds.  So while everyone is downgrading Nokia on news that should have been predictable let’s look at what is going right.

Amazon.com keeps a list of best selling smart phones with plans on their website and the Lumia has been on top since the day it was released.  Check out the reviews for a taste of what customers are saying, the average is 5 star as of 4/17/11.  But Amazon isn’t the main source of the Lumia 900, their main seller is AT&T who has an exclusive contract with Nokia to sell the phone.  And AT&T plans to make the most of this exclusivity.  They announced that they will push the Lumia with more advertising dollars than they spent on the iPhone and add this to the marketing that Nokia itself is putting behind the device and you have a powerful combination.  The success isn’t the only positive the phone is bringing to the company; beyond just increasing Nokia’s revenue it is boosting the profit margin itself as they are making much more per phone with the Lumia series than they did with Symbian or their feature phones.  As they release more top of the line smart phones the company will come back into the limelight and their net income will likely buck its recent downward trend.  In case you haven’t been following the company they have a low price point tablet in the works and will be one of the first companies to release phones and tablets on Windows 8, Microsoft’s bid into the world of mobile operating systems.

The company isn’t quite in the clear yet.  They have had success with the Lumia 900 but that success has not been astounding by any means.  So the verdict is still out but with a solid contender for a number three spot in the smartphone market, more phones in the pipeline, a huge supporter in Microsoft, and even a bargain priced tablet, Nokia has lots of potential to improve its position and thus I am long on the stock.  Now with all of that said the stock may still go down but historically it has been rare that a stock will go much below their cash per share and Nokia is right at that level.  So I encourage you to go out to your local AT&T, check out the phones, read the reviews, and come a Foolish decision!

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Ready to Play with Activision

I like to be in the know – I’m going to assume you do as well.  And I think that Activision (NASDAQ: ATVI) is something you should be enlightened about.  The company makes some darn good games that are just plain fun to play.  When StarCraft came out I loved it and played it with friends for months.  Based on personal experience and an in-depth analysis, I think the company is a solid buy.  I am going to cover three main areas that make Activisionattractive and then detail a few reasons that may make you have second thoughts.  From that point you can do some further analysis with a bit of an edge on your counterparts, and hey, maybe it’ll lead to you making a great stock choice!

First off Activision is well known and respected in the gaming industry.  This does not mean they are set in their ways but rather means that gamers know they make quality and long-lasting games  Some say that Apple (NASDAQ: AAPL) may infringe on their business but let’s get real.  Apple makes great games for the iPhone and iPad.  They make games that are lots of fun for very casual gamers and I am sure they will continue to do it successfully.  But for people who want an immersive experience with massive worlds and tens of thousands of other gamers to interact with – Activison has the solution and Apple doesn’t.  Activision has the world’s largest online multiplayer game in World of Warcraft, they developed a number of the record breaking Xbox games in the Call of Duty series and the extremely lucrative Guitar Hero packages, and have PC classics with cult like followings in StarCraft and Diablo.  Many of these games are still driving in solid revenue for the company.  They have successes on almost every gaming platform with a history of long staying power.

The second is that for their number one position in the gaming industry as well as their strong balance sheet and income statement, their stock seems to be very reasonably priced.  Both the company’s net income and profit margin have increased the past 4 years yet the price has held relatively steady.  The company has $3.5 billion in cash which allows it to put $650 million into developing new games and technologies like it did in 2011.  With a trailing P/E of 13.75 and a forward P/E of 11.82 the company is hard to call expensive.  In addition, and quite impressively, the company has basically no debt.  The company is extremely profitable and is pouring money into research to become more profitable while lowering costs.  Sounds like a recipe for success to me.

 

Third is that they already have lasting value and are working hard on future games which will be greatly successful in the long run.  The company has had fantastic success with subscription games and is trying to increase and replicate this success by incorporating systems in games where players can trade in game weapons and supplies for real world money.  There is already a large black market for this and they are simply capitalizing on this.  In addition and more important to milking their current successes, ATVI has some great and even “game changing” releases in the works.

They are releasing Diablo III, the 10-years-in-the-making PC title which has quite a bit of hype surrounding it and will be snapped up by the still loyal players of Diablo II.  Estimates for first year games sales are at 5 million and even if it only reaches a more conservative 4.5 million or so, at $60 retail per game, that will inject a huge amount of cash into the company for further game development.  Additionally they are innovating with games like Skylanders where ATVI sells small figurines which unlock features of the game which, importantly to shareholders, have very high profit margins.  The company has also gotten rights to develop the new Transformers games as well as the next installment of Call of Duty.  Finally the game that could be the biggest boon for ATVI is currently codenamed “Titan” and is still in the early development stage butaccording to COO Paul Sams it is “the most ambitious thing we’ve ever attempted…  And I feel like we have set our company up to succeed on that. We have some of our most talented and most experienced developers on that team.”

Now for a few negatives. Activision hasn’t moved much at all since 2009 and so what is going to make them move now?  Well to be blunt they might not move in the next six months.  So if you’re in it for the short term this may not be the stock for you.  The company has had a slight decline in its subscriptions to WoW over the past few periods which may indicate that the game is losing its sway over members – a bad sign for one of the most profitable segments of the company.  The competition is always searching for the next game which will let them overtake WoW or surpass the success of Call of Duty and this possibility cannot be completely ignored.  Finally the overall gaming industry has been down the last two years and this may roll over and impact ATVI in a more substantial way as time progresses.  Phew, glad I got all of that out of the way.

There has been a lot of Foolish discussion about Activision of late and I wanted to give readers a broad overview of the company – a jumping point from which to continue your research.  The company has a team with a history of innovation and success, some awesome looking games in the pipeline, loyal fans, and a rock solid financial foundation.  Though it may not sky rocket in the next few months I think this company has some potential and should be considered for anyone who wants a gaming stock with little obvious downside and great growth opportunities.

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