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"Asha" in Hindi means hope and that is exactly what Nokia's (NOK) "quasi smartphone" Asha range of phones is doing for the battered Nokia stock- bringing hope. The Finnish mobile giant is showing some positive news after a long time.

How Nokia Declined

The mobile phone market has changed radically in the last few years with the advent of Apple's (AAPL) iPhone. The introduction of iPhone was a major game changer for the Technology Industry. The whole existing ecosystem underwent a fundamental realignment with the leading incumbents being hit the hardest. Nokia is arguably the company which lost the most in the iPhone era. The company has faced a torrid time as its revenues, profits and stock price have kept plummeting relentlessly. However, Apple and Android have not been the only competitive problems for Nokia, as the company has got squeezed from the bottom as well. Nokia's Indian Fortress has crumbled in the face of competition from Samsung, LG and local players like Micromax (watch for its IPO in India), Karbonn, and Spice etc. In China, white-box players and local companies like Huawei, ZTE have never allowed foreign companies to dominate.

Focus On Technology Rather Than Consumer

Like other technology companies, one of the major reasons for Nokia's decline is its focus on research rather than marketing. It reminds me of another great technology company Novell that had an awesome product portfolio, but failed miserably in marketing those products. As a result, Novell which competed with Microsoft in the 1990s has become a pale Linux shadow of its former self. On the other hand, one of the primary reasons for the stunning success of Apple is its relentless focus on consumer needs and marketing. To put things in perspective, Nokia spent $40 billion on R&D in the last 10 years compared to around $10 billion for Apple. While Apple concentrated on making and marketing a few great products (iPod, iPhone, iPad), Nokia dissipated its energy in developing hundreds of products most of which are extinct now.

Nokia's Efforts Till Now Have Not Helped

Nokia has been way behind the product curve in the smartphone market, where its global marketshare has gone down to ~8% from ~40%. The company has realized that it needs to change radically in order to survive the paradigm change in the technology market. Nokia has tried all the tricks of the trade. These include new product launches, management changes, restructuring, selling off its Finnish headquarters, cutting costs by killing nonviable products (Symbian, Meego). Till now, none of these strategies has helped. Here we list some of these changes.

  1. Management Changes - Nokia appointed a new CEO Stephen Elop from Microsoft, who came from a non-Finnish and non-Nokia background. The previous CEO Olli Pekka had overseen a huge 70-80% fall in the company's value. Elop changed the direction of the company radically abandoning the Symbian operating system in favor of the Windows Operating System.
  2. Product Launches - Nokia has not delivered a hit phone for a long time now. The last major product introduction was N8, whose features and price points suggested that it would be a big hit. However, despite a fantastic 12 MP camera, AMOLED Screen and HDMI connectivity, the N8 proved to be a dud. The N900 also failed miserably.
  3. Firing workers and selling its Finish HQ - Nokia has been forced to sell its HQ for Euro 170 million. The company has also decided to fire 10,000 employees as it downsizes its costs to match its reduced revenues.

But Asha And Lumia Are Showing Rays Of Hope

After a long time, Asha and Lumia are showing signs of positive change for Nokia. The company has managed to create a buzz in both the high and low end segments.

Asha Is Rattling Competitors In The Low End Segment ($80-120 range)

The Asha range of phones which retail for around $100 have rattled the competition. Competitors in India are complaining that Asha is being marketed as a smartphone by Nokia, despite not technically not being one. But for customers, semantics don't matter. Nokia is trusted for its quality, brand and durability in India.

The Nokia Asha series of phones delivers most smartphone features like Wi-Fi connectivity, touch screen, large screen size and a decent camera at a fraction of the Galaxy, iPhone costs. The buyers of the $100 range phone don't really care for a 5 inch touch screen or a 12 mp camera. Getting a phone with most of the smartphone features at an incredibly low price from one of the best brand names is a sure shot winner. Therefore, it is not surprising that Asha phones are selling like hot cakes in India. Nokia has shipped more than 6.5 million Asha touch handsets in the third quarter.

While Lumia Is Getting Good Reviews In The High End Segment ($500-700 range)

The Nokia Lumia range of phones is meant for the high end smartphone segment. After a long time, a smartphone from Nokia is unanimously getting great reviews from major technology blogs and publications. I think there is an element of tiredness with only 2 alternatives in the smartphone market - Android and Apple. The mobile market used to be a vibrant place with a wide variety of phones and O/Ses. I think some users would migrate to Nokia just to escape the monotony of Android and iPhone.

Summary And Valuation

Nokia is almost up 100% from its all time low of ~$1.9 (touched in June 2012) as beaten up mobile phone companies like RIMM have started finding value buyers. Motorola was bought by Google for $12.5 billion, primarily for its patent portfolio. Nokia has a formidable patent portfolio which is much larger than Motorola. So Nokia's current $14.2 billion portfolio implies that the market is not factoring a change in its fortunes. Nokia has also got a 50% equity stake in the Nokia Siemens telecom equipment JV. The company despite making losses for the last few years has got invaluable IP and a global distribution network. A sale of this stake (to say someone like Huawei or ZTE) could lead to additional upside in the future.

At 0.3x sales and 1.5 times book value, the company is quite inexpensive when compared to other technology companies. I would not buy Nokia just yet, till I see sustained traction in mobile sales and a return to profitability. Nokia has cut its workforce and costs quite substantially in the last year, but it might need to cut more in order to align its costs with the lowered revenues. The stock at its current value, does not present a great risk given that its core technology assets provide a high floor price. I would watch the sales and profit trajectory like a hawk for a potential buying opportunity.

Source: Nokia's Beaten Down Stock Finally Gets Some Asha