It lost money again (though admittedly less than Q1 2012) and featured a headline decline of 31% in handsets.
So is Nokia doomed as Apple (NASDAQ:AAPL) iPhones and gadgets running Google (NASDAQ:GOOG) Android take over the world? Or should investors be cheered by gains in sales for its flagship Lumia phone produced in partnership with Microsoft (NASDAQ:MSFT)?
My two cents: Nokia is not beyond repair. While it might never return to its previous levels and there’s always a chance it will be scrapped and sold for parts, the Windows Phone partnership will be its saving grace.
Just be prepared for a crazy, volatile ride if you get into Nokia stock.
The Ugly Truth About Nokia
Nokia has been a troubled company for quite some time. From its dot-com peak near $60 a share, the stock is down about 95% to about $3. From its more recent pre-recession levels around $30, it’s down 90%. More recently, from its 2010 highs of about $15, it’s down 75%.
In other words, owning Nokia stock for more than a few months has been a bad idea for basically a decade or more.
Most recently, the losses haven’t just been for shareholders. Nokia failed to turn a profit in 2011 and 2012, and is forecast to barely break even in 2013 if things go as planned.
Oh yeah, and a big reason for that break-even status is the elimination of a 143-year-old dividend policy. Hardly a reason to think things are turning around.
Wall Street is keenly aware of this, with almost 300 million shares of Nokia held short. That’s roughly 10% of the float, and gives the company a short ratio of almost 7 — meaning it would take nearly seven full days of trading at current volume (about 45 million shares daily) to flush out the short sellers.
Among the dogs of the investing world, Nokia is right near the top of the list.
Reasons for Optimism
Even with all that as context, however, it’s worth noting that Nokia is not about to go bankrupt. Despite posting a loss this week in its Q1 numbers, that loss was narrower than last year and comes after it posted its first profitable quarter since 2011 in its previous earnings report released in January. The company also has more than $10 billion in cash and short-term investments on the books.
So while things are grim, the company is not on life support. This is important to note.
The big issue is, of course, strategy. In 2011, Nokia CEO Stephen Elop famously tried to rally the troops with an ambitious memo that referred to his company as a “burning platform” in the middle of the North Sea. The only choices were to die a fiery death or leap into a freezing ocean and hope for the best.
Around the same time, NOK and Microsoft teamed up — an alliance that both hoped would put them on equal footing over dominant mobile players like Apple.
While this partnership hasn’t resulted in instant success, it has indeed seemed like a shrewd move. In its earnings this week, amid the disappointing big-picture numbers. there was hopeful news in the fact that Nokia sold more Lumia phones (5.6 million) in Q1 than it did in Q4 2012 (4.4 million).
This validates previous reports from firms like Kantar that indicate Microsoft and its Windows Phone OS — and by proxy, Nokia — are making inroads with their smartphone alliance. Admittedly, while a jump from 2.7% share to 4.1% share isn’t going to make Apple shiver in its shoes, it is very encouraging.
The biggest reason I think Nokia has staying power is because Windows Phone is probably the most viable competitor for the bronze medal in the smartphone race. BlackBerry (NASDAQ:BBRY) has high hopes with its Z10 and Q10, but Microsoft has a massive war chest, a similar enterprise reach and the same back-against-the-wall desperation.
I personally believe that MSFT is going to eat BlackBerry’s lunch. And the natural beneficiary of that is its hardware partner, Nokia.
Of course, the million-dollar question is whether that will be enough to stem the bleeding at Nokia. Since it’s not a sure thing that Nokia will stick around — or that the dividend will ever be reinstated, for that matter — I would not advise a buy-and-hold strategy here or a Polyanna turnaround trade.
But after the recent selloff, it might be a decent aggressive investment to put a little bit in NOK stock on a dip, protect it with a stop-loss and see where you are in a few months’ time.
- And we haven’t even gotten into Nokia’s joint venture with Siemens (NYSE:SI) and how to play that longer-term. (WSJ)
- The full text of the infamous “burning platform” memo from Nokia’s CEO. (Engadget)
- Will a “phablet” help Nokia recover some lost share price? (International Business Times)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at email@example.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.