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Nokia Corporation (ADR) (NOK), Apple Inc. (AAPL): What Will The Future Bring?

Nokia Corporation (ADR) (NYSE:NOK), a long-time titan of mobile phone industry, is currently in a now-or-never situation to revive its business. The company is facing stiff competition, its sales are declining and the stock is tumbling. When the company announced its first-quarter earnings, investors wanted a reason to believe in the stock. But there was only despair, and shares declined 11.45% on the same day to $3.02.

Nokia Corporation (ADR) (NYSE:NOK)Declining sales

Though Lumia shipments jumped 27% QoQ to 5.6 million units in the first quarter from 4.4 million 4Q2012, it had little impact on the company’s overall sales. That’s because Lumia makes up for only about 9% of Nokia Corporation (ADR) (NYSE:NOK)’s total mobile phone sales. The shipment of feature phones, which account for about 90% of its unit sales, declined 21% year over year to 55.8 million units. That’s an alarming rate. Moreover, an IDC survey reveals that smartphone sales will soon exceed feature phone sales, which will further weaken Nokia Corporation (ADR) (NYSE:NOK)’s stronghold. The decline in volume sales hurt revenue. As a result, quarterly revenue fell 32% to 2.9 billion euros.

Fierce competition

Nokia Corporation (ADR) (NYSE:NOK) was the global leader until the emergence of Apple Inc. (NASDAQ:AAPL)‘s iPhone and Android-based smartphones. Then the Finnish mobile phone maker wanted to focus on low-cost feature phones. But, Indian and Chinese OEMs have started manufacturing entry-level Android smartphones that are priced so low that customers prefer to go for those smartphones rather than a feature phone.

Nokia Corporation (ADR) (NYSE:NOK)’s Asha lineup is facing direct competition from Samsung’s Rex series that targets the same market segment. Since the Korean electronics giant is far too aggressive with its marketing campaigns, Rex is highly likely to snatch market share from Nokia Corporation (ADR) (NYSE:NOK) Asha.

In the top-end market, the competition is even greater. Apple Inc. (NASDAQ:AAPL) sold 37.4 million iPhones in the January-March quarter of this year, compared to Nokia’s 5.6 million units. Apple Inc. (NASDAQ:AAPL) is rumored to launch low-priced iPhones by the end of this year.

With the launch of the low cost iPhone, Apple Inc. (NASDAQ:AAPL), which has made a name for itself in the high-end gadgets market, should also become popular in the emerging markets as it moves down-market. Available data shows that Apple Inc. (NASDAQ:AAPL) is selling more iPads and iPhones; and business from software and iTunes is still growing rapidly.

Some people are of the belief that with the launch of the low cost iPhone, it would spell trouble for Nokia. This is far from the truth because this launch means brand dilution for Apple Inc. (NASDAQ:AAPL), and as such, an opportunity for Nokia to garner more market share through its premium phones.

BlackBerry‘s Z10 is selling well, and the U.K. launch of the Q10 received phenomenal response as the device sold out within hours of its release. Samsung’s Galaxy S4 is eagerly anticipated around the world. Thus, Lumia is facing tough competition from every side, which creates an uncertain outlook about the device.

Additionally, BlackBerry has a much stronger distribution network. Even during its initial rollout, Z10’s distribution was at par with iPhones and the Galaxy S3, and far better than the Nokia Lumia 920. Such a strong distribution network indicates that the Canadian company can achieve significantly strong sales figures without the need of a large market share at each carrier.

For example, in the U.S.,Canada, and the top five European countries (Germany,France,Spain, the U.K. and Italy), 23 of the 25 carriers offer Z10. And those 23 carriers have 89% of the total subscribers. In contrast, Nokia Lumia 920 is available on only 14 of the 25 carriers that represent less than 56% of the total subscribers in the above seven countries.

Weak financial position

On April 15, Moody’s downgraded Nokia’s short-term and long-term debt ratings to Baa3 from Baa2, just one notch above the junk territory. The credit rating agency has a negative outlook on the company. Nokia’s 3-year average revenue growth rate is (4.94)%, compared to 39.79% of Apple. EPS growth in the same period was (21.92)% against 69.41% of Apple.

At the end of the first quarter, Nokia’s profit margin was (8.54)%, return on average assets was (4.62)% and return on equity stood at (24)%. All the financial indicators create a gloomy picture for the company. Also working against the company is the fact that it has no products in the rapidly growing tablet market.

Conclusion

Nokia is trying hard to return to profitability, but sustaining in the market remains a big challenge for the company. As its sales continue to shrink, Nokia is expected to become a takeover target. Nokia is betting big on Microsoft Corporation (NASDAQ:MSFT)’s Windows Phone OS. If Microsoft Corporation (NASDAQ:MSFT) thinks that Nokia’s survival is questioned, they may acquire the Finnish phone maker and make it their mobile hardware division. The market is getting more competitive with each passing quarter, so consolidation is highly likely.

The article A Look at the Future of This Distressed Smartphone Maker originally appeared on Fool.com and is written by Naomi Warmate-Igwe.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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