Nokia (NOK) and Research in Motion (RIMM) can't both succeed. Nokia's recent success means it is time to sell RIM.
With such fierce competition between Nokia and RIM, it seems reasonable to assume that the success of one would mean the demise of the other. But the simultaneous rise of both these companies' stocks follows no such logic. Over the past 3 months, shares of NOK and RIMM have fluctuated in shockingly perfect parallel.
The Race for Third
It is well known that mobile carriers are eager to elect a third contender in the smartphone operating system wars. This fact has been the primary driver behind the recent rebounds of Nokia and Research in Motion, the two companies hardest hit by the dominance of Apple (AAPL) and Samsung (SSNLF.PK).
Nokia's fate hinges on the performance of the Windows Phone 8 platform as it holds between 50-70% of the Windows Phone market. Research in Motion's survival depends on the success of their upcoming Blackberry 10 operating system.
However, Nokia and RIM cannot both succeed. There is barely room for a 3rd player in the smartphone industry. Coming in 4th in the smartphone race means almost certain bankruptcy. In 2012, the profits of the entire smartphone hardware market were split between just 2 companies; Apple and Samsung. All other smartphone makers lost money, including HTC in third place.
Two Different Stories
The market performances of these two stocks might suggest their situations are identical. But the headlines paint an entirely different story, one that favors Nokia. In November, Nokia released the latest in its Lumia smartphone line. Since then, positive news streamed in of sellouts across the globe culminating in Thursday's report that Nokia is finally making a profit from its devices division thanks to a surge in smartphone sales. As a result, Nokia's shares have spiked roughly 75% since the release of the Lumia.
In stark contrast to Nokia's success with Lumia, Research in Motion has continued to delay the release of Blackberry 10, suffered through reports of declining Blackberry 7 sales and even lost a lawsuit to Nokia. But it seems the market has largely ignored the negative outlook for RIM, instead inflating its market value some 75% from its October lows.
The comparison between Thursday's 18% skyrocket in NOK shares and RIMM's 13% surge on Friday makes for a great case in point. Nokia was up on a great pre-earning report that included 16.7 million smartphone sales, the best numbers Nokia has posted in a year. Where Nokia was up on great numbers, RIM is now up on great hype. In fact, analysts aren't sure which piece of news drove RIM shares higher. Although, a quick Google news search brings up negative reports of malfunctioning software and/or connectivity for current Blackberry users. But maybe investors liked Fox's favorable review of BB10 or the media's affection for RIM CEO, Thorsten Heins.
Optimism Premium on RIMM
It is clear that there is a lot of Blackberry 10 optimism priced into RIMM. This may or may not be well founded but it is certainly expensive for investors as demonstrated by the 25% freefall that RIM suffered after releasing a lukewarm earnings report.
By contrast, there is virtually no optimism priced into Nokia's current fair value of 4.70. Analysts valued NOK at around $4.50 back in October, well before Nokia had proven its Lumia line would catch on. As analysts adjust their outlook for Nokia based on its upcoming earnings report, bullish projections will likely fall in the $6-8 range.
It's All About the Product
Ultimately, both RIMM and NOK shares are unlikely to stay at their current value. Both companies will radically rise or decline depending on how their respective platforms perform. And Lumia and BB10 are radically different product lines targeting opposite ends of the spectrum.
The colorful Lumia line targets fashion conscious consumers and provides a playful alternative to the ubiquitous black and white business phones. The Lumia line along with Windows 8 attempt to "democratize design"- provide a sexy, well-made product that is accessible to budget conscious consumers. This is an untapped product category, as current budget devices are either last year's models or poorly considered knock-offs of high end devices.
Blackberry 10 attempts to take iPhone and Android head on in the highly saturated business phone market. The Blackberry 10 attempts to provide a more fluid interface alongside incrementally innovative features. Critics call the Blackberry London hardware as seen in recent leaked photos a blatant iPhone rip-off. RIM seems to have largely ignored budget consumers and developing markets, releasing a new BB Curve with T-Mobile that still runs the outdated BB 7 software.
It is unanimously believed that budget smartphones are the future and developing markets provide incredible growth opportunity. If Nokia continues to succeed in this area, they will see many-fold growth in smartphone revenue.
BB 10 faces daunting competition in Apple's iPhone and Samsung's Galaxy lines that dominate the business class market, supported by multi-billion dollar advertising budgets. Furthermore, early adopters looking for alternatives to iPhone and Galaxy are already moving towards the high end Lumia 920 camp, in no small part due to Microsoft's (MSFT) billion-dollar Windows 8/Windows Phone 8 ad campaign.
For these and other reasons I encourage readers to ignore or sell the overhyped RIMM and buy NOK shares while they are still relatively inexpensive.
Additional disclosure: I am a product designer and I have spent 1 year consulting for the current industry leader in smartphones on their flagship product. I consider myself an expert in the smartphone industry.