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Nokia’s (NOK) Last Stand

By: , dated June 18th, 2012

Shares of Finnish mobile phone maker Nokia (NOK: Charts, News) recently crashed to a 17-year low, after the struggling company announced that it would lay off 10,000 global employees, or a third of its total workforce, in a last ditch effort to stay afloat. The company also sold its Vertu handset subsidiary to private investors, and announced that it would sell its patents “for the right price.” Credit rating agency Moody’s (MCO: Charts, News) then slashed Nokia’s debt rating to near junk level, shattering the confidence of analysts and investors.

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Nokia once traded for nearly $40 per share a mere five years ago. Since then, Apple’s (AAPL: Charts, News) iPhone and Google’s (GOOG: Charts, News) Android devices have pummeled Nokia, along with Blackberry maker Research in Motion (RIMM: Charts, News), into dust. Analysts who once believed that Nokia’s partnership with Microsoft (MSFT: Charts, News) would be its saving grace have abandoned those hopes, after the company’s Lumia devices failed to dent the markets shares of Apple and Samsung, the largest Android handset maker.

A deluge of downgrades followed the negative announcements last week. Credit Suisse CS downgraded Nokia from “outperform” to “neutral” while Nordea Equity Research cut its rating from “buy” to “hold.” UBS (UBS: Charts, News) cut its price target from $3.25 to $2.50, and Canaccord Genuity decreased its target price from $3.50 to $2.70. European equity firms Societe Generale and Natixis also slashed their price targets for Nokia.

Nokia’s shift from its aging Symbian OS has been disastrous. Its first Windows phone, the Lumia, has failed to attract a significant following. The problem has been exacerbated by the comparative tininess of Microsoft’s Windows Mobile Marketplace, which is dwarfed by Apple’s App Store and Google’s Play Store. Analysts forecast that Nokia will have to sell its Lumia handsets at steeper discounts in order to gain traction with customers, which will pressure margins for the rest of 2012. CEO Stephen Elop, a former Microsoft executive, still believes that Windows Phones are the key to turning around Nokia’s ailing smartphone business.

While Apple was once the primary threat to Nokia’s survival, South Korean electronics giant Samsung has hit Nokia hard over the past year, stealing market share away in the low, mid and high end segments of the handset market. Over the past twelve months, Nokia generated $44.75 billion in gross revenue, compared with Samsung’s $147.82 billion and Apple’s $142.36 billion. Nokia’s profit margin is also negative – at -6.84%, while Samsung and Apple have far healthier margins of 8.95% and 27.13%, respectively. Lower revenue and negative margins have led many analysts to believe that Nokia is unlikely to survive the remainder of fiscal 2012. In addition, Nokia has approximately 1 billion euros ($1.3 billion) of restructuring charges due by the end of 2013.

The 10,000 jobs that Nokia intends to cut in 2012 will increase the company’s total number of job cuts over the past two years to over 40,000. During this time, the company also closed its only plant in Finland. To keep its head above water during this difficult time, CFO Timo Ihamuotila announced that it was willing to sell its patents – its most valuable asset – at the “right price.” Nokia’s patent portfolio contains 30,000 patents and approximately 10,000 patented innovations. These patents are potentially valuable to Apple, which currently pays Nokia royalties for each iPhone and iPad sold, and its nemesis Google GOOG, which bought Nokia’s former rival Motorola (MOT: Charts, News) in a bid to build a defensive patent shield. Nokia’s patent portfolio remains its most potent weapon for generating capital – last month, the company sued HTC Corp. HTC and Research in Motion for patent infringement in the United States and Germany.

Squatting on patents, however, seems to be Nokia’s last ditch effort to remain relevant. Nokia’s current behavior closely resembles that of Eastman Kodak (EK: Charts, News), in the final year leading up to its bankruptcy. Kodak managed to score several decisive patent settlements against Apple and Research in Motion before losing control of its core business. Nokia now stands at those crossroads – it’s the company’s last chance to sink or swim.

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Leo Sun Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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One Response to “Nokia’s (NOK) Last Stand”

  1. How can you compare the Kodak Patent Portfolio to The Nokia Patent Portfolio?

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