Warning Nokia's (NOK) Cash Pile Could Be At Risk Sends Shares Plunging Further
NOK Hot Sheet
Rating Summary:4 Buy, 13 Hold, 10 Sell
Rating Trend:
Down
Today's Overall Ratings:
Up: 16 | Down: 7 | New: 23
Despite Tuesday's 14 percent slide on a revenue warning, shares of smartphone maker Nokia (NYSE: NOK) are down another 8 percent Wednesday. Weighing on the shares are a host of analyst downgrades - at least 4 this morning alone. While all the negative banter is worrisome, one specific comment from Goldman Sachs could be sticking in the craw of investors.
Goldman suggested if Nokia's revenue continues to slide, the company could burn through it's €6 billion cash pile.
On this dreadful scenario, Goldman analyst Tim Boddy stated, "Assuming a 30% contribution margin on revenues (which could be too low), we estimate that every €1 bn drop in handset revenues creates €300 mn of operating losses, which will cost another €300 mn of restructuring expense to offset. Thus, a further 30% drop in the revenue run rate (currently €5 bn / quarter), implying a €6 bn drop in annualized revenues, would result in operating losses and restructuring charges of at least €3.6 bn, which is our current base case estimate of Nokia's post-restructuring cash pile."
The analyst also sees parallels between Nokia and Motorola's (NYSE: MOT) 2007/2008 situation becomingt similar. While Motorola's position was more precarious, the firm said a clear lesson is that it is "difficult and time-consuming to rebuild distributor, retail and supplier confidence in your brand once market share has collapsed."
The downside risks in Nokia shares is "much larger than we had anticipated," the firm concluded.
While Goldman voiced many concerns in its downgrade, the firm suggests there is compelling upside potential if the Microsoft (Nasdaq: MSFT) Windows-phone initiative is a success.
The firm downgraded shares of Nokia from Buy to Neutral, also reducing the stock's price target from €8.80 ($12.40) to €5.20 ($7.30).
NOK shares last traded at $6.50.
Discover Wall Street's best ratings calls with the pros - Upgrade to Ratings Insider Elite. Free Trial!
Goldman suggested if Nokia's revenue continues to slide, the company could burn through it's €6 billion cash pile.
On this dreadful scenario, Goldman analyst Tim Boddy stated, "Assuming a 30% contribution margin on revenues (which could be too low), we estimate that every €1 bn drop in handset revenues creates €300 mn of operating losses, which will cost another €300 mn of restructuring expense to offset. Thus, a further 30% drop in the revenue run rate (currently €5 bn / quarter), implying a €6 bn drop in annualized revenues, would result in operating losses and restructuring charges of at least €3.6 bn, which is our current base case estimate of Nokia's post-restructuring cash pile."
The analyst also sees parallels between Nokia and Motorola's (NYSE: MOT) 2007/2008 situation becomingt similar. While Motorola's position was more precarious, the firm said a clear lesson is that it is "difficult and time-consuming to rebuild distributor, retail and supplier confidence in your brand once market share has collapsed."
The downside risks in Nokia shares is "much larger than we had anticipated," the firm concluded.
While Goldman voiced many concerns in its downgrade, the firm suggests there is compelling upside potential if the Microsoft (Nasdaq: MSFT) Windows-phone initiative is a success.
The firm downgraded shares of Nokia from Buy to Neutral, also reducing the stock's price target from €8.80 ($12.40) to €5.20 ($7.30).
NOK shares last traded at $6.50.
Discover Wall Street's best ratings calls with the pros - Upgrade to Ratings Insider Elite. Free Trial!
You May Also Be Interested In
- OmniVision (OVTI) Volatility Up on Move Lower
- Wedbush Downgrades Maxwell Technologies (MXWL) to Neutral; Elevated Competitive and Supply Chain Risks
- Facebook (FB) Warned You About Weak Q2 Three Times
Create E-mail Alert Related Categories
Downgrades, Momentum Movers, Trader TalkSign up for StreetInsider Free!
Receive full access to all new and archived articles, unlimited portfolio tracking, e-mail alerts, custom newswires and RSS feeds - and more!
