Tag: NOK

RIMM upcoming quarterly report

RIMM’s (Nasdaq: RIMM) expectations have finally been driven deeply into the red – an expected loss of 46 cents for this upcoming quarter, 1.49 loss for the current fiscal year and 71 cents for the next fiscal year (year ended February 2014).

I earlier suggested that potential investors in RIMM should wait until these estimates go deeply negative. They are now currently negative and I would suspect after this quarterly report, the company is going to get expectations to the point where the risk has been correctly priced in if not already there.

While I am not buying RIMM shares, people that believe in Blackberry 10 and its potential probably have a correctly timed entry point in the remainder of this year – especially as most institutional investors will be sitting on tax losses and would likely want to clear it out of their portfolio or risk embarrassing themselves.

There is still obvious technology adoption risk for the company – if they execute well then you might be sitting on a double or even more if they are able to regain market share (and perhaps the more important mind-share of the developers). If they don’t, well, then you get a Nokia (NYSE: NOK) where you start pricing the company based off of salvage value.

Nokia vs. RIMM

While Apple’s iPhone continues its consumer mania and Android being almost akin to what Microsoft Windows was when it was dominant in the 1990’s, one has to wonder whether there is a market for the low end of mobile phone users.

For example, this includes myself, where I am perfectly happy not having a data package which is slowly making me a rare individual in my age bracket.

So I took a brief look at Nokia (NYSE: NOK) which attempted to compete in the high end market but obviously lost. However, there should still be a space for them in the market – just not at the insanely huge margins that companies like Apple get on every iPhone. It is not like the winner-take-all market of operating systems back in the 90’s – although the application market does drive some component of sales, ultimately if the device has a web browser and is compatible with the local telecom company’s wireless infrastructure it will sell. The question is at what price.

Strictly looking at the numbers, paying a $4 billion enterprise value for a company still making $44 billion in sales seems like a relatively decent margin of error cushion. An additional factor is that the analysts still project Nokia to be losing money this year and barely making anything in the next year. Ideally you’d want to see both of those projections to be even less rosy.

This is why I wouldn’t invest in RIMM at the moment – expectations have not been hammered down enough, although they are getting to the point where your margin of error is somewhat compelling relative to sales and what you are paying.

Disclosure: No positions in either company.

Nokia valuation

I have read some posts by people out there that believe that Nokia is a value play and is worth purchasing. It is trading at a price that is lower than it has been in a decade ($8.36/share presently; as late as 2007 it was $40/share). I’ve briefly looked at Nokia and, financially speaking, while they have a decent balance sheet and some positive net income, their profitability is sliding down and this represents why the market has discounted the stock.

The first item I would like to address is the dividend – it is very likely it will be slashed. An investor putting money into Nokia for the dividend is going to be very disappointed, likely within a year. Nokia will need to go into a cost cutting and capital conversation mode soon and the easiest thing to go before making the very difficult decisions is the dividend.

However, the proper valuation analysis for Nokia is not a financial one; rather, it is determining who is going to be the winner in the mobile handset space. A decade ago, Nokia was clearly the champion in this industry – for the most part they edged out Motorola and Ericksson (now Sony Ericksson).

Between then and now, we have seen a huge quantum leap in mobile technology. Voice functions are trivial – it is all about mobile data, web and video. Apple has invaded the space with their hardware/software offering (iPhone), and Google has invaded the space with their software (Android). These two factors alone have likely put Nokia behind with inferior product offerings.

While I am not the techie I used to be when I was younger (I no longer follow the computer hardware scene and my cell phone is a 2004 Nokia model that I use exclusively for voice and will feel bad if I lose it), I still peripherally follow the industry. It has matured so quickly compared to when I was a teenager that it has gotten relatively boring. That said, there are plenty of people out there that follow it feverishly, and the following comment by somebody following Nokia’s operating system (Symbian) pretty much sums up the picture:

To Nokia, you guys are losing. Hard. Wake the hell up. Doing the same thing repeatedly while expecting different results is the definition of insanity. I’ve been a huge Nokia fan since my 2nd cellphone, and I just can’t do it any longer. You guys aren’t competing like you once were, and everyone but you seems to see that. You used to build the world’s best smartphones, the world’s best cameras, the world’s best GPS units – you’ve lost pretty much all of that, and with nothing to show for it. You unveiled your Ovi vision over 2 years ago – I was there. Today, it’s still a complete mess. I have to log in every single time I visit the site – regardless of how many times I check the ‘remember me’ box. I spent 6 months (and about 3 hours at Nokia World 2009) trying to find someone to help me with Ovi Contacts on the web – no one knew who to point me to. You spent millions of dollars purchasing your Ovi pieces – Ovi Files, Ovi Share, and a host of other little companies – are you proud of what you ‘built’ with them? Most of your own employees (that I’ve talked to) don’t even use them, so why should I?

This really reminds me somewhat of what happened to IBM’s OS/2 when they were competing against Microsoft in the desktop operating system marketplace. Another example is what happened to Cyrix when they were competing against AMD and Intel for the processor market. Both had inadequate offerings and were only running on steam before they finally folded – Cyrix was bought off by IBM, and OS/2 was canned. I am sure there is a better analogy that would apply to this particular situation, but the point is the same – Nokia’s mobile platform, in absence of something completely hidden and not marketed yet, is toast.

Without control over the platform, there is no opportunity for them to gain a market premium, and they will become a commodity producer of mobile hardware – a very low profit industry. Nokia’s best option is likely to sell out as quickly as possible to the highest bidder since with every passing week they will be commanding less of a premium on the market.

If Nokia’s board of directors are rational, they should be looking for an exit, but finding somebody willing to fork out $31 billion to buy out the company (this assumes no takeover premium) would be difficult. As such, I wouldn’t touch Nokia equity – investors are likely to face continued losses. You might even be able to make a good case for a short sale, but my knowledge in this area of the business world is not comprehensive enough to make such a decision.