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Wouldn't Rush Into the New Nokia

It will soon be flush with cash, but the company is far from out of the woods.
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We all know that the Nokia (NOK) mobile phone/smartphone business will soon be a part of Microsoft (MSFT). Thanks to continued share gains by Apple (AAPL) and Samsung, players in that industry are starting to drop: For instance, BlackBerry (BBRY) and HTC are both currently on the ropes. So it will be interesting to see how the Nokia-Microsoft combination progresses, and if it will serve as a repeat of the tie-up between Google (GOOG) and Motorola Mobility. I'm sure folks will watch and comment on it, and regardless of whether it works, I'm willing to bet there will be people playing the "told you so" game one way or another.

But the smartphone business generated only 49% of Nokia's revenue through the first half of 2013. The balance came from its mobile-infrastructure business, Nokia Siemens Networks, and now a mapping business called "Here." Buried inside all of this, Nokia will keep its patent portfolio, and it will look to monetize this much in the way that InterDigital (IDCC) and other intellectual property and technology-licensing companies try to do.

As part of the Microsoft-Nokia deal, the new Nokia will get a significant cash infusion from Microsoft -- but the former is far from out of the woods. That's saying something, given Nokia's Here mapping business.

The mobile-infrastructure industry tends to be a lumpy and a cyclical one that is tied to mobile carrier spending. The capital-spending budgets at AT&T (T), Verizon (VZ), Telecom Italia (TIM), Vodafone (VOD), China Mobile (CHL) are crucial: As those budgets go, so does the revenue stream not only for the new Nokia, but also for such names as Ericsson (ERIC), Alcatel-Lucent (ALU), Huawei and ZTE.

During rising-capital spending cycles -- and as we see mainstream acceptance of new mobile technology, such as 4G LTE -- revenue swells at mobile-infrastructure suppliers. Yet Alcatel-Lucent just announced it will eliminate 10,000 jobs as CEO Michel Combes accelerates a $1.4 billion cost-cut plan. While there is speculation Alcatel-Lucent may be cleaning itself up for an eventual takeout by the new Nokia, in reality it is having a difficult time dealing with the far lower cost structure enjoyed by Huawei and ZTE. By comparison, one-third of Alcatel-Lucent's workforce is in Europe, one-quarter is in the U.S. and the balance is in Asia.

While there are prospects for Nokia to grow its Here mapping business, the company will face stiff competition in the form of Apple and Google, among others. Recall that Google recently completed the acquisition of Waze, a company that combines GPS and mapping with social media, thus delivering a nifty driving experience complete with warnings. Both Apple and Google are targeting what I call The Connected Car with their offering, and it will get plenty crowded with Here, Garmin (GRMN) and others looking to make their way as well. Best-case scenario: Nokia gets some traction, but at what margin against these players?

The long and short of it is that, even though the new Nokia will soon be flush with cash, the company will have its work cut out for it. It's not a stock I would rush into anytime soon.

At the time of publication, Versace had no positions in the stocks mentioned.