Struggling mobile phone maker Nokia (NOK: Charts, News, Offers) sorely disappointed investors on Tuesday after it cut its second quarter forecast substantially, expect to miss the targets it set only a few weeks ago. This prompted a sell off which crushed the stock, with shares plunging over 20% during regular trading to a 13-year low. Ever since the debut of Apple’s (AAPL: Charts, News, Offers) seminal iPhone in 2007, Nokia has watched its shares plunge from nearly $40 to under $6. The rise of Google’s (GOOG: Charts, News, Offers) Android devices only expedited the former market leader’s demise, and was exacerbated by the company’s stubborn refusal to use its vast resources and cash hoard to produce a viable entry to the smartphone revolution.
Last September, investors were puzzled by the hiring of Microsoft (MSFT: Charts, News, Offers) executive Stephen Elop – a man best known for producing Microsoft Office products – as CEO, and were further frustrated by Nokia’s partnership with Microsoft to produce Windows Mobile 7 phones. Many industry observers have noted that Nokia’s best path would be to adopt Android to connect its handsets to Android’s vast app store and shared Google resources – a humbling move the Finnish company has adamantly refused to take. Elop’s words didn’t inspire much investor confidence. “Android is gaining strength. Apple is Apple, of course,” he flatly stated in an analyst conference call.
Elop, the first non-Finnish CEO of Nokia, believed that a partnership with his former employer, Microsoft, would be the best way to integrate its handsets, often criticized as proprietary and cut off from the rest of the smartphone world, into an existing cross-company system. Unfortunately, Windows Mobile 7 has been met with a tepid consumer reaction. The “new functions” of Windows Mobile 7 – such as “instantly posting a photo to Facebook” and “Widget Tiles” – seem outdated – and combined with a faded, aging brand like Nokia, seem all the less attractive. Nokia also appears to be phasing out its workhorse Symbian platform as well as its highly anticipated joint venture with Intel (INTC: Charts, News, Offers), the Meego Linux-based operating system, which was slated to be the company’s answer to Android. In February, Meego’s team manager Alberto Torres left Nokia, shortly after the company announced its partnership with Microsoft.
Nokia and Microsoft’s cozy hand-holding overhaul has led many analysts to speculate that the software giant may eventually purchase Nokia, whether by friendly or hostile means. At its current depressed price, Nokia’s market cap of $26.6 billion would be a huge acquisition, but would give Microsoft the assets it needs to churn out its own smartphones, tablets and possibly netbooks to remain competitive with Apple and Google. However, Microsoft is still attempting to digest Skype, which it purchased for $8.5 billion last month, and investors probably shouldn’t bank on Ballmer as a potential savior for Nokia’s share price, yet.
In the meanwhile, Nokia has announced that it expects to “substantially” miss its net sales estimate from its devices and services business for its second quarter, previously projected between 6.1-6.6 billion euros. The company had only set this target a few weeks ago. Nokia also announced that the company is losing business due to tough competition in Europe – the company’s formerly unassailable stronghold. To make matters worse, Elop stated that “management issues” hurt its business in China, where it lost footing to Taiwan-based HTC and South Korea-based Samsung, both major forces in Google’s Android army. Lower-priced and more feature-rich Android phones have severely hurt Nokia across valuable Asian markets. Nokia’s lower-end offerings are traditional cell phones, not smartphones, while its competitors have been able to produce inexpensive smartphones running on the freely distributable Android. Nokia has also been hit hard on the high-end – where industry kingpin Apple reigns supreme with its annual iPhone offering.
The company has stated, “Given the unexpected change in our outlook for the second quarter, Nokia believes it is no longer appropriate to provide annual targets for 2011.” However, the company would still provide quarterly targets. Nokia cut its forecast non-IFRS operating margin of 6-9% to around break-even, which implies a steep loss for the third quarter. Elop believes that once Windows Mobile 7 has become more established and the first Windows-based Nokia phones become available in the fourth quarter, the company will be able to stage a turnaround. However, that delay is dangerous, considering the losses the company could incur in the months between, and its loss of market share to Apple and Google could permanently cripple the company’s chances of a comeback given the fast paced changes in the mobile market.
To maintain its balance sheet, Nokia announced that it would cut 7,000 jobs last month as well as outsource its valued Symbian operating system development unit in order to cut costs. Although Nokia is trading with a P/E of 9.9 with a 1.49 price-to-book ratio, bottom-fishing value investors should be wary that the company may fall into the red for the remainder of fiscal 2011. Meanwhile, the bears will swarm all over the company, which has made vague promises of a comeback which may or may never come.
Last September, investors were puzzled by the hiring of Microsoft (MSFT: Charts, News, Offers) executive Stephen Elop – a man best known for producing Microsoft Office products – as CEO, and were further frustrated by Nokia’s partnership with Microsoft to produce Windows Mobile 7 phones. Many industry observers have noted that Nokia’s best path would be to adopt Android to connect its handsets to Android’s vast app store and shared Google resources – a humbling move the Finnish company has adamantly refused to take. Elop’s words didn’t inspire much investor confidence. “Android is gaining strength. Apple is Apple, of course,” he flatly stated in an analyst conference call.
Elop, the first non-Finnish CEO of Nokia, believed that a partnership with his former employer, Microsoft, would be the best way to integrate its handsets, often criticized as proprietary and cut off from the rest of the smartphone world, into an existing cross-company system. Unfortunately, Windows Mobile 7 has been met with a tepid consumer reaction. The “new functions” of Windows Mobile 7 – such as “instantly posting a photo to Facebook” and “Widget Tiles” – seem outdated – and combined with a faded, aging brand like Nokia, seem all the less attractive. Nokia also appears to be phasing out its workhorse Symbian platform as well as its highly anticipated joint venture with Intel (INTC: Charts, News, Offers), the Meego Linux-based operating system, which was slated to be the company’s answer to Android. In February, Meego’s team manager Alberto Torres left Nokia, shortly after the company announced its partnership with Microsoft.
Nokia and Microsoft’s cozy hand-holding overhaul has led many analysts to speculate that the software giant may eventually purchase Nokia, whether by friendly or hostile means. At its current depressed price, Nokia’s market cap of $26.6 billion would be a huge acquisition, but would give Microsoft the assets it needs to churn out its own smartphones, tablets and possibly netbooks to remain competitive with Apple and Google. However, Microsoft is still attempting to digest Skype, which it purchased for $8.5 billion last month, and investors probably shouldn’t bank on Ballmer as a potential savior for Nokia’s share price, yet.
In the meanwhile, Nokia has announced that it expects to “substantially” miss its net sales estimate from its devices and services business for its second quarter, previously projected between 6.1-6.6 billion euros. The company had only set this target a few weeks ago. Nokia also announced that the company is losing business due to tough competition in Europe – the company’s formerly unassailable stronghold. To make matters worse, Elop stated that “management issues” hurt its business in China, where it lost footing to Taiwan-based HTC and South Korea-based Samsung, both major forces in Google’s Android army. Lower-priced and more feature-rich Android phones have severely hurt Nokia across valuable Asian markets. Nokia’s lower-end offerings are traditional cell phones, not smartphones, while its competitors have been able to produce inexpensive smartphones running on the freely distributable Android. Nokia has also been hit hard on the high-end – where industry kingpin Apple reigns supreme with its annual iPhone offering.
To maintain its balance sheet, Nokia announced that it would cut 7,000 jobs last month as well as outsource its valued Symbian operating system development unit in order to cut costs. Although Nokia is trading with a P/E of 9.9 with a 1.49 price-to-book ratio, bottom-fishing value investors should be wary that the company may fall into the red for the remainder of fiscal 2011. Meanwhile, the bears will swarm all over the company, which has made vague promises of a comeback which may or may never come.
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