The market is having second thoughts about Nokia's untouchable status. It's easy to see why. The Finnish handset maker is starting to look less like a company in terminal decline and more like one that's merely in painful transition.
Investors should be in no doubt about the challenges facing Nokia's handset business, which still accounts for more than half its revenue. Apple's stranglehold on the top end of the smartphone market persists. Devices based on Google's Android operating system dominate the value segment. Worse, cheap Chinese smartphones pose a threat to its low-tech "feature phone" business in emerging markets, a cash cow for Nokia.
The pain was evident in the second quarter. Nokia's pre-tax loss widened to €878-million ($1.1-billion) from €544-million in the same period in 2011. Restructuring costs were only partly to blame. Revenue fell 19 per cent, with handset sales 26 per cent lower overall and down 41 per cent in China. Some €220-million worth of unsold stock was written off.
Yet Nokia may be stabilizing. The network infrastructure business – almost half of company revenues – has returned to the black. Operating cash flow was €102-million in the second quarter, and Nokia still has a €4.2-billion net cash cushion. Bears will argue that cash flow is a lagging indicator in tech. But the cash-generative feature phone business suffered only a 1 per cent dip in sales versus the first quarter. The patents business, plus payments from Microsoft under Nokia's Windows-phone partnership, provide further cash crutches.
Future growth depends on the new Windows-powered Lumia, a late arrival the smartphone party. Some four million units were sold in the second quarter, almost double the prior quarter. The device seems to have gained some pricing power in the United States. The imminent launch of Windows 8 can only help.
Operating weakness and restructuring charges pushed reported net losses to €3.1-billion in the six months to June 30. Will the first half of 2012 be as bad as it gets? True, the shares hold only option value: A turnaround is a low probability, high value event. But Nokia's cash is 75 per cent of the market capitalization.
The early signs of stabilization, plus Lumia's toehold, make it harder to argue the option is overpriced.