The year of 2012 was very volatile for Nokia (NYSE:NOK). Surely, the company had a lot of ups and downs; mostly downs in the first half of the year, and mostly ups in the second half of the year. Nokia's share price is significantly down from the $15 it saw only 2 years ago, yet it is significantly up from the $1.7 it saw as recently as last year. What's next for Nokia? Can it go further up from here or will it take a rest?
Time To Take Profits?
On Wednesday, some analysts suggested that it is time to sell Nokia and take the profits. These analysts seem to believe that Nokia will not come up with a new product anytime soon whereas the competitors such as Sony (NYSE:SNE), Huawei and LG are about to introduce new products at the International Consumer Electronics Show to be held this weekend. I find this interesting because in the last few months alone, Nokia has launched a number of phones ranging from cheapest to most expensive in many markets around the world. As we speak, Nokia's current line of phones sell like hot cakes and the company doesn't need to introduce a new phone to the market every month to see consumer demand. For example, Apple (NASDAQ:AAPL) has been able to build the strongest brand name in the world by simply introducing one or two new phones in the market every year. Of course, Nokia can't be compared to Apple at the moment, but the company surely has enough new products in the market to attract consumers for the time being.
Would investors panic and start a sell off if Nokia doesn't release a new phone model this weekend at the at the International Consumer Electronics Show? I would say "probably not". In the last 2 years, Nokia's investors have learned how to be patient and how to have faith in the company in the long run. Currently, Nokia's investors aren't expecting the company to release new phone models in the market; rather, they are expecting the supplies of the current line of phones to catch up with the current demand.
Nokia Tablet Rumors
There are a lot of rumors regarding Nokia's interest in building its own tablet. So far, the rumors haven't been either denied or confirmed by Nokia. The idea might be still in its early stages. Of course, this tablet would most likely to run on Windows operating system due to the partnership between Nokia and Microsoft (NASDAQ:MSFT). The tablet will have a 10 inch screen, an extra battery, two USB ports and its own keyboard. Because Nokia brings high quality in everything it builds, this product can gain a lot of attention from the consumers. Last September, I said that Nokia should wait until its mobile phone division is profitable before jumping into tablet business. That way, if the tablet business didn't do well in the beginning, the phone business could support it for a while. I still feel the same way. I'm sure a Nokia tablet will face a strong demand, but I still like the idea of waiting until the phone business turns around completely in order to avoid struggling in two fronts as opposed to one.
Microsoft to Buy Nokia?
Tristan Louis, who is a contributor at Forbes, suggested that Nokia will finally give up from making phones in 2013. Mr. Louis seems to believe that Nokia will fail to make a profit in the hardware business and it will end up selling its hardware segment in order to focus on software and infrastructure alone. He said:
"The biggest shocker (and what I suspect will be my most controversial prediction), though, will be the departure of Nokia from the phone business as the company, sell its mobile operation and infrastructure divisions to Huawei in order to focus on software and services. With the company's bet on Windows [Phone] 8 having failed in the marketplace, it will see Microsoft and Huawei competing for the mobile device division and will eventually sell its smart phone group to Microsoft and the rest of its telecom interests to Huawei."
I don't know where Mr. Louis got his idea from, but there were a lot of discussions on the internet regarding the possibility of this idea. Nokia has reported a loss for 6 quarters in a row and this streak might or might not come to an end soon. The results in the last 6 quarters don't necessarily reflect what will happen in the later quarters though. First of all, in the last several quarters, Nokia has spent a lot of money for reorganization efforts, which accounts for a large portion of the reported loss. Second, Nokia never had a product that could compete with Apple's flagship phone, iPhone; however, it now has Lumia 920 which is good enough to compete with Apple along with other companies out there. Third, at least two out of the Nokia's existing three business segments are expected to show operating profit in the next year, which is hopeful for the company.
It is said that Microsoft had approached Nokia in 2011 in order to acquire the company; however, the possible deal fell apart after Nokia's balance sheet was examined. Since that day, this rumor surfaced many times and to my knowledge, neither side has ever denied the rumor. We don't really know what Microsoft saw in Nokia's balance sheet, but it could be many different things. Since 2011, Nokia has improved greatly in many ways. Now the company is much leaner in terms of workforce and there are far fewer layers of management than there were in 2011. The company might be a more attractive target for buyers. I am not saying that Microsoft will buy Nokia or anything, but it is always a possibility. Without Nokia, the whole Windows Phone project might be dead. Microsoft has been showing a lot of interest in building its own hardware lately and a lot of people expect it to start building its own phone soon. Even if Microsoft went that route, it would still need expertise, patent portfolio and distribution channels of Nokia in order to stand a chance.
Supply and Demand Issues
As much as supply goes, Nokia seems to be doing better now compared to a couple months ago. In Germany, one of the biggest markets for the company's flagship phone, the online orders are being fulfilled within two to three days. Last month, there was a shortage of Lumia 920s in Europe and the waiting period was as much as several weeks. In China's Shanghai, the first batch of Lumia 920s (the Chinese version) sold out within 2 hours and the second batch sold out within 20 minutes. In the country, Windows phone has a lot of room for growth with a current market share as low as 3%. Even though Nokia required the consumers to pre-order the phone online, there was still a long line in front of the store selling the phone. Until the third batch of shipment arrives, the residents in Shanghai will be able to buy Lumia 920s online in retailers such as 360Buy.
After China Mobile, the largest mobile carrier company in China (and possibly the World), Nokia also signed a partnership with China Unicom, which is the second largest mobile carrier in the country. It is said that China Unicom would subsidize the phone just like its competitor China Mobile. This should increase the demand even further in the country. In China, Apple is having a huge trouble with having its phone subsidized by the carriers and the simple fact that Nokia was able to get its phone subsidized is a small victory itself.
After the Christmas, many stores in the US started to sell Lumia 920 on a deep discount. This made many people worry that the phone wasn't seeing much of a demand in the country. Earlier on, Lumia 920 was reported as "sold out" in most AT&T stores and many online stores; however, the short supplies were blamed for this. Now that sellers are able to offer discounts on this phone, it should be safe to say that the supplies of this phone are improving. After all, if the supplies were still short, there wouldn't have been discounts. As I mentioned before on my several articles, Nokia doesn't determine the final sale price of its phones in many countries. The company supplies the sellers with phones, and lets the sellers decide on the price. This is why there are huge price variations between countries (e.g., the sale price of Lumia 920 in Italy is almost twice as much as that in the US). Nokia usually charges the sellers a flat fee regardless of the final sale price of the phone and this gives the sellers a lot of freedom in terms of setting a price. Last month, while AT&T stores sold Lumia 920s for $99 with a 2-year contract, Amazon was able to offer the same phone for $39 with a 2-year AT&T contract. Therefore, I am not too worried about the recent discounts offered on this phone in the US.
In 2013, things are looking good for Nokia. The phone gained a lot of publicity and there is strong demand. Nokia seems to be getting better at meeting the high demand as the supply sides gets better. As more people use Lumia phones, the word of mouth will keep spreading and more people will be inclined to buy these high quality phones. I expect 2013 to be an exciting year for Nokia investors.
Disclosure: I am long MSFT, NOK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.