Nokia is one of our largest positions and I follow it closely. After the upward surges of stock price related to selling mobile phones unit to Microsoft and Alcatel-Lucent acquisition the stock hasn't gone anywhere in last 5 years.
Nokia stock price in last 5 years (NYSE) in U.S dollars
Chart courtesy of StockCharts.com
My key worry relates to very weak gross margin (GM) in the core business outside of patent/licencing business.
Networks unit had really poor GM in Q1 (26,9%). We have many technology stocks (Intel, NVIDIA and Micron) that have better net margin than Nokia's GM even though they are lower in the food chain as component suppliers to equipment manufacturers.
The GM of Nokia's software unit isn't either in the level what you would expect for _software_ (40.3%). After R&D and SG&A expenses the Software unit is only near breakeven profitability whereas Networks is clearly a loss making unit. Even if you would take Networks' result and replaced minus sign to plus sign it still would not be a great result.
One other thing I do not understand with Nokia is that where are the synergy benefits from ALU deal? By now they should have come through all the way to the bottom line.
Nokia has spent so many years in restructuring that it would be about time to get out of that negative cycle. However, the result at hand is so weak that it screams to look at R&D and SG&A expenses harder than ever before.
5G in large scheme of things is just another large business cycle on top of GSM, 3G and 4G. In the long run, the company has to be in good shape to sustain the cyclicality of the business.
In terms of profitability, I would expect more like 10% net profit from base business PLUS profits from Technologies unit on top. It can be achieved in many other fields of business so why not here.
You can't endlessly make excuses that the profitability .... will follow ... some day.
Disclosure: We are long Nokia and do not consider to sell or buy in next 48 hours.
