On January 10, Nokia (NOK) stock immediately rocketed upwards by 18% to $4.45 upon news that its Devices and Services division will post underlying profitability for this quarter. Nokia executives estimate fiscal fourth quarter net unit sales of 4.4 million Lumia smartphones. If achieved, this performance would be a sharp improvement above the prior quarter, when Nokia only sold 2.9 million Lumia phones. Technology pundits now highlight the Lumia - Windows platform as a viable third option beneath the Apple iOS - Google Android duopoly. Nokia stock, at one point left for dead, has now clocked a staggering 188% return off the July 2012 low at $1.63. A Nokia Renaissance would be most threatening to the fortunes of Research in Motion (RIMM) and Apple (AAPL) shareholders.
The smartphone Market
The smartphone is now the centerpiece of a consumer electronics ecosystem that includes telecommunications, computing, audiovisuals, and entertainment. Financially, Apple is the leading champion of this ecosystem model, as its popular iPhone is the bedrock supporting a $500 billion empire. During its latest 2012 fiscal year, Apple sold 125 million iPhone units to generate $80 billion in revenue. The iPhone, of course, provides a direct gateway into Apple's integrated iTunes, iPad, and iMac platforms. Over time, it is inevitable that intense competition will challenge the Steve Jobs halo effect.
To date, Google (GOOG) Android has emerged as the most formidable rival to the Apple ecosystem. Outside of this consumer electronics duopoly, a multitude of players, including Nokia, are scrambling to consolidate resources and negotiate deals. For investors, volatility is the order of the day, as the smartphone market reflects a "winners take all" structure.
On January 3, research firm comScore released a report for November 2012 U.S. mobile subscriber market share. This latest analysis takes averages for the quarterly period between September and November of last year. According to comScore, Google Android and Apple iOS operating systems power 54% and 35% of all smartphones, respectively. On the handset side of the ledger, Samsung and Apple control a combined 45% of this hardware market. This smartphone duopoly is actually consolidating power, as Samsung, Google, and Apple have all increased market share over the prior quarter.
At the bottom of the heap, Research in Motion BlackBerry, Microsoft (MSFT) Windows, and Nokia Symbian engineers divide a paltry 11% share of the smartphone market between themselves. The BlackBerry 10 release, set for January 30, looms large as a threat to Nokia's immediate turnaround efforts. Nokia must first ward off the Research in Motion challenge before it can establish itself as a lasting and profitable third wheel alongside the iOS - Android smartphone duopoly.
Nokia Lumia Versus Blackberry 10
Nokia executives fired the opening salvo of this latest war with a series of patent infringement lawsuit claims against Research in Motion throughout 2012. Last December, Research in Motion settled the case for $65 million and agreed to make ongoing royalty payments for the use of Nokia patents. Without proper settlement, Blackberry 10 phones would have been effectively banned from coming to market.
Upon release, technology enthusiasts anticipate that BlackBerry 10 phones will be notable for advanced security features and its Hub interface. BlackBerry Hub is a digital junction for social networking, email accounts, text messaging, and BBM real-time chat. For security purposes, users can toggle through separate work and personal accounts on the BlackBerry 10 device. Research in Motion, it seems, is still catering towards the IT professional and corporate technocrat, rather than the teenage girl popular culture fanatic. This very same strategy, however, ultimately preceded the collapse of the BlackBerry Empire. According to writer Jesse Hicks and The Verge, Research in Motion is an electrical engineering business, rather than a consumer electronics operations. In effect, RIM is the Anti-Apple.
The premium Nokia Lumia 920 is a fun phone "designed to wow." Nokia offers its Lumia phones in five separate colors that are especially radiant when juxtaposed against staid black and silver Blackberry 10 models. The Lumia is notable for the picture clarity of its PureView camera that comes equipped with an 8.7-megapixel camera. The Nokia mapping application has also emerged as a winner against the backdrop of the recent Apple Maps debacle. The tables are slowly turning.
Beyond technical specifications, Nokia also benefits from the deep pockets of AT&T (T) and Microsoft backers who are hell bent upon toppling the Apple Empire and leveling the consumer electronics playing field. AT&T retails the Nokia Lumia 920 and 16 GB Apple iPhone 5 for $99 and $199, respectively, if patrons agree to the terms and conditions of a two-year service contract with the carrier. In exchange for long-term cash flow, AT&T offers an up-front $450 subsidy on the iPhone 5 and a $350 subsidy on the Lumia 920. AT&T will save $100 in subsidies on each Lumia 920 sold at the expense of the Apple iPhone 5. Certainly, AT&T executives will issue orders for sales associates to aggressively hawk Lumia phones to consumers.
The Bottom Line
Again, the rise of Nokia poses an immediate threat to the bottom line of Apple shareholders. These two stocks are showcasing a strikingly negative correlation - with Apple stock declining from $705 to $500, while Nokia shares record multi-month highs on a near daily basis this past quarter. On January 14, Apple stock lost $18.55, or 3.57% in value, as The Wall Street Journal reported that the company would be cutting back iPhone 5 production due to weakening demand.
For Apple shareholders, these latest events are further indicative of intensifying competition from the Nokia Lumia. Apple iPhone margins will compress, as the smartphone platform becomes increasingly commoditized and consumers evaluate cheaper alternatives. The inevitable shift towards the product maturity stage will heighten volatility in Apple stock performance because the iPhone accounts for more than half of Apple's fiscal 2012 net sales. Apple shares may break down sharply to $450, after falling through the $500 technical support price.
At $4.60, Nokia shares effectively trade as a call option. Nokia executives will employ financial engineering strategies to float the note and prop up shareholder value, until real market penetration with Windows phones can be sustained. Nokia's latest settlement award from Research in Motion proves that this company can extract value from its patent portfolio.
In Nokia's latest quarterly report for period ended September 30, the company claimed $7.6 billion in goodwill and other intangible assets. In addition to this intellectual property, the Nokia balance sheet also includes $11.1 billion in cash and securities above $21 billion worth of liabilities. To date, Nokia executives have managed cash flow effectively through sweeping layoffs, debt refinancing, and the consolidation of real estate. Over the next year, Nokia can save another $1 billion, if it were to eliminate its dividend.
On the income statement, Nokia's losses are primarily the result of a collapse in smartphone sales. Before its most recent positive Lumia announcement, Nokia was reporting a 56% decline in year-over-year smart devices net sales. For now, aggressive investors must be willing to take a gamble that the Nokia Windows phone will outlast the Blackberry 10, while also staving off the inevitable release of the Apple iPhone 6.
Conservative investors should avoid attempts to game developments in the smartphone market.