Ripples From Nokia

On Thursday Nokia (NOK) once again announced a one-two combo. Second-quarter earnings are to be even more disappointing that previously expected, it has plans to lay off 10,000 employees and it also intends on shuttering factories, research facilities and several management changes. As I have repeatedly stated, the smartphone industry is in a bloodbath battle as it consolidates around three key players, much the way the mobile phone industry, PC industry and other have before To date, the top two smartphone players are Apple (AAPL) and Samsung, with a key third vendor yet to emerge. Potential bronze medal winners were once considered to Motorola-Google (GOOG), HTC and LG, but all three have had market share issues of late, per comScore data. Nokia is not the first company to make an early announcement of a shortfall vs. expectations this quarter. The uber-challenged Research In Motion (RIMM) recently reduced expectations yet again, and HTC recently cuts its outlook following weaker-than-expected demand in Europe. What do all three of these companies have in common? They've issued several forecast cuts each in as many quarters. Time will tell whether these companies look to double down and claw their way to either success, or simply survive -- but it doesn't look like it will be getting any easier. Next week, at CommunicAsia, Sony (SNE) is set to unveil its latest Xperia smartphones. In the second half of this year, white-box handset makers are expected get more aggressive in China's handset market, bringing sub-$79 smartphones based on MediaTek solutions to market. Other Chinese handset vendors looking to expand their footprint in Europe and the U.S. include Lenovo, ZTE and Huawei. In short, it looks like as though and Research In Motion has a tough road ahead, no matter how it looks to reduce its cost structure. In my nearly 20 years following companies and their stocks, I don't believe I have ever seen a company cut its way to growth. Needless to say, I continue to bearish on smartphone vendors, particularly those that are not competing in the tablet space and are not positioned for the next battleground -- the connected home. The ripple effect of Nokia's pre-earnings announcement will pressure key suppliers that have meaningful exposure to Nokia's mobile phone business. These include RF Micro Devices (RFMD), for which which Nokia generated 14% of sales last year, as well as Skyworks Solutions (SWKS) and STMicro (STM), both of which counted Nokia as a more-than-10% customer last year. Of the three, both RF Micro and Skyworks are positioned to grow their dollar content as 3G WCDMA matures globally and 4G LTE continues to be deployed -- and this as the overall industry shifts to more RF-heavy smartphones from mobile phones. Factor in Wi-Fi, cellular powered tablets and machine-to-machine solutions, and both RF Micro and Skyworks are somewhat insulated -- but not entirely so --against Nokia. Skyworks shares are up 69% year to date; I'd look to revisit them with fresh money closer to $22. Similarly, I'd be more interested in RF Micro shares between $3.50 and $3.75. The other company that will be impacted by Nokia's continued short comings is its smartphone software partner Microsoft (MSFT), which has yet to find any solid footing in the smartphone space. Despite its less-than-impressive progress to date, Microsoft is slated to have a major event on June 18, and speculation suggests the company is going to announce ARM-based tablets running Windows 8. We'll know more about that next week, but even so, the company needs to shore up its smartphone offering if it intends to challenge Apple's iOS and Google's Android products. As for Nokia itself, while the stock is cheap, the erstwhile market-share leader in mobile phones is now outflanked and faces a number of attacks on several fronts. Moreover, some of the stated goals by management, such as the aim to invest in key feature phone technologies like the Nokia Browser, aiming to be the world's most data efficient mobile browser, do little to inspire confidence. In many ways, Nokia reminds me of Digital Equipment Corporation -- another one-time high flyer that lost its way and did not recover.

Ripples From Nokia

That was discouraging news -- but, fortunately, two of its largest suppliers should stay fairly insulated.

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