Nokia Slows the Bleeding but Smart Phones Still a Sore Topic

photo: WN / Rubielyn Bunag

Nokia Slows the Bleeding but Smart Phones Still a Sore Topic:

Nokia (NOK) has suffered over the last year on the erosion of its share of the high-end smartphone market. Where do we go from here? NOK beat estimates today largely because the consensus was so gloomy.

Cost cutting remains a major objective here, but NOK did better than expected on the top line as well. This is not a path to glory, but small steps to recovery for this former giant.

Handset sales are still declining at a rate of 10% on a sequential basis and operating margins are coming down. Guidance is somewhere between 6% and 9%, which is a spread you can drive a truck through.

And smartphones that run the Symbian operating system, once NOK’s crown jewel, have become just 19% of the market.

Android, which did not even exist two years ago, now runs 38% of all smartphones out there, and of course the iPhone from Apple (AAPL) has made huge inroads into NOK’s ancestral turf.

At this point, the key for NOK may not even be the smartphone business, but in the low-end voice handsets, which continue to dominate the global marketplace.

CEO Stephen Elop seems to be taking the view that he has two different companies here. The mass market phones accounted for 78% of all units shipped last year and 50% of revenue.

The smartphones? It will take awhile for NOK to adjust its product line to machines that run Microsoft’s (MSFT) Windows.

Meantime, you can own this at an 11x valuation, but based on guidance, we may already be looking at a number of 16-18x estimated 2011earnings and 25x 2012. Not a good trend.

I believe in the long-term turnaround, but this has parallels to the auto industry where the legacy leaders — giants like Ford (F) and General Motors (GM) — found themselves outdated, inefficient and fat with unfocused R&D and labor costs.

They only became relevant again after they fully broke down their business and rebuilt their product lines to be competitive in the new technological and customer environment.

Mobile phones have become a similar commoditized product — obviously at a different price point, but that only makes them more disposable.

This is why NOK’s fall from grace has been so devastatingly fast.


Seeking Alpha
Thursday, April 21, 2011