When I first wrote about Nokia (NOK) many months ago, I dismissed its turnaround efforts and warned my readers to basically "stay away". The advice actually turned out to be pretty bad in the near term, as the stock ran from $2.37 to about $3.25 after the article came out. As I watched the stock continue to rally up, while I wasn't short, I like to understand my mistakes, so I decided to dig more deeply into the story. Quite frankly, I found myself almost stunned that I hadn't looked more deeply into it.
At $2.37, the stock had a ton of valuation support from the net cash position that it held on its books, in addition to the gobs of value that the company has from its brand, the Nokia-Siemens Network, and the Navteq mapping (which became super valuable in light of the Apple (AAPL) maps slip-up). So I quickly changed my tune, pointed out the viability of a turnaround play when the stock came back down to $2.67, and took a long position. I took my chips off the table when the stock went to about $3.40 and was happy to have nailed those gains.
Of course, my timing was terrible (surprise!), and the stock has traded well above my sale price to as high at $4.60, after pre-announcing a surprise profit. While the stock has come down to the $4.18/share level, I remain bullish. Why? My view of the smartphone industry is that it's going to be dog-eat-dog world out there. The margins will get slimmer, and it'll take high volumes to profit on the mainstream, while at the same time some real differentiation to maintain high ASPs at the high end.
Nokia's Aiming Low -- Where It Counts
Nokia doesn't come from the world of glamorous, high-margin smartphones like the iPhone. It's used to selling feature-phones, and lots of 'em. While feature phones are going to go the way of the dodo, they will be supplanted by fully-featured smartphones. In the future, say 3-5 years out, very few will be willing to pay the high prices for smartphones that we see today. The "cheap" smartphones will be so fast, so responsive, and so cheap to make that nearly everyone in the world will eventually have one, and they'll all be pretty much the same.
Nokia's strategy fits perfectly with this vision. In addition to offering the flashy, glamorous, and decidedly high end Lumia 920 and its younger Lumia 820 sibling, the company sells the Lumia 710 and 610 for the more budget minded. Not only will cheap, but fully featured smartphones help to raise Nokia's brand awareness, but it will also eventually lead to a run rate in volumes that can reasonably support the company's smartphone business. The higher end phones will be the profitable icing on the cake, but certainly not the main course.
In short, Nokia is doing everything that it needs to in order to become a solid long-term player in the smartphone wars. Volume at the low end, mindshare at the high end. It's rational, and it's got every chance in the world of success.
The Dividend Cut -- Not A Big Deal
Keeping that fat dividend around was an exercise in lunacy. Nokia is still a company that is still in recovery mode. The profitability was not there to support that gigantic dividend, so the fact that people may have sold the stock off because of the dividend cut is somewhat perplexing. Considering that the company is not consistently profitable, and further considering that the company needs every penny that it can spare "in case of emergency", it would be lunacy to keep paying that dividend.
Besides, the dividend is a mere pittance compared to the daily gyrations that the stock undergoes. If you really, really want that $0.57/yr on your Nokia shares, consider selling some covered calls or -- gasp -- doing a little swing trading. If you are holding Nokia as a dividend play, then you're in the wrong stock. Might I direct you to Apple for a dividend-paying smartphone vendor?
Nokia's a solid turnaround bet. If you believe in the story, buy it on a day when it does one of those 5%-losses because some analyst downgrades it, or some incremental data-point about Lumia sales not being so great in whatever-random-country-you-want-to-pick. The stock price will be determined by the company's ability to return to consistent profitability (that will get shareholders to $7-$8), and then any growth from there will likely be proportional to the year-over-year revenue and profit growth that the company can eventually show. Oh, and the dividend will probably come back, too.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.