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Introduction

Nokia (NYSE:NOK) is the world's second largest producer of mobile phones having been displaced by the giant Korean conglomerate Samsung (OTC:SSNLF). The company has not only lost the pole position in the mobile industry but has also become a marginal player in the higher margin and faster growing smartphone segment. Nokia which used to command ~40% marketshare of the global smart phone market has seen its marketshare decline to just ~8% now. Apple's (NASDAQ:AAPL) iPhone has captured a big share of the smartphone category along with Samsung. NOK has been forced to cut back heavily on costs and has even sold its iconic HQ in Finland, in order to adjust to the new lower level of revenues. The company has been clawing back through its new partnership with Microsoft (NASDAQ:MSFT). Nokia has entered an exclusive agreement with MSFT to populate its smart phones with the Windows operating system only. This has allowed the company to cut the costs on software development by abandoning the Symbian operating system. I had recently suggested that it is tough for companies to be simultaneously strong in both smartphone hardware and software. Nokia seems to have come to the same conclusion. Nokia is looking in a much better shape after introducing a new range of Asha and Lumia phones.

Android Drones

  1. Samsung - Samsung has become the unquestioned star of the smart phone industry becoming the No.1 company in both smartphone as well as normal mobile phones. Samsung has become the Nokia of yesterday, managing to compete successfully at all price points. The company (unlike Apple) is not only strong in the USA but also other geographic markets like India. However, Apple is now increasing focus on the smaller emerging markets, as growth has slowed down in the developed markets. Samsung continues to introduce blockbuster phones almost every other quarter.
  2. Motorola - Motorola which was bought by Google (NASDAQ:GOOG) is targeting the high end of the mobile phone market. Though the company has become a shadow of its former self, Motorola has the potential to make a comeback since its parent is the owner of the Android operating system.
  3. Sony (NYSE:SNE)- The Japanese electronics giant Sony has also hitched on the Android bandwagon and is using its hardware expertise to win market share. The company's "Experia" line of smart phones has managed to win users through its cool design factors. The Sony brand name has also helped the company in winning customers over local brands.
  4. LG - The second Korean global handset giant LG is also using Android operating system for its smart phones. While LG also has some MSFT based products, the majority of its sales are Android smartphones ("Optimus" range).
  5. HTC - This Taiwanese high end smart phone maker has seen a big decline in fortunes due to Samsung's rise in the smart phone market. The company has also been hurt by Apple's lawsuits. HTC had become a serious competitor to Apple, but now it's ranking have dropped down considerably. However HTC is still a large Android player and is a Nokia competitor.
  6. Chinese telecom giants - The huge Chinese market for smart phones has attracted the domestic telecom giants Huawei and ZTE. These companies have become the top 10 players in a very short span of time, managing to sell good Android smart phones at a competitively cheap rate. Huawei is now targeting the US market with top of the line products such as Ascend Mate.
  7. Other big Chinese IT companies - Like Dell (NASDAQ:DELL) and HP (NYSE:HPQ), Lenovo (OTCPK:LNVGY) is facing a declining PC market and needs to diversify into mobile segments in order to offset the revenue decrease. The company has become an aggressive smartphone player using its extensive distribution network in markets such as China and India. The big Chinese TV player TCL, has also become a top 10 mobile phone supplier using its strength in its home market.
  8. Local Indian companies - The Indian mobile phone companies are also leveraging the free Android operating system to seriously challenge the dominance of the incumbent players. Micromax, Karbonn, Spice and Lava are some of the bigger Indian players which have carved a decent market share through cheap Android smart phones. These companies have become better with the passage of time and the quality has improved. Micromax's new Canvas 2 A116 was sold out on its first day of launch.

Table 1

Worldwide Mobile Phone Sales to End Users by Vendor in 4Q12 (Thousands of Units)

Company

4Q12

Units

4Q12 Market Share (%)

4Q11

Units

4Q11 Market Share (%)

Samsung

106,957.7

22.7

93,830.3

19.6

Nokia

85,054.8

18.0

111,699.4

23.4

Apple

43,457.4

9.2

35,456.0

7.4

ZTE

16,160.6

3.4

18,915.1

4.0

LG Electronics

14,981.3

3.2

16,938.3

3.5

Huawei Technologies

13,679.1

2.9

13,966.1

2.9

TCL Communication

11,097.6

2.4

10,695.3

2.2

Lenovo

8,305.4

1.8

5,206.3

1.1

Sony Mobile Communications

7,946.6

1.7

8,935.7

1.9

Motorola

7,822.2

1.7

10,075.3

2.1

Others

156,613.7

33.2

151,985.1

31.8

Total

472,076.4

100.0

477,703.0

100.0

Table 2

Worldwide Mobile Phone Sales to End Users by Vendor in 2012 (Thousands of Units)

Company

2012

Units

2012 Market Share (%)

2011

Units

2011 Market Share (%)

Samsung

384,631.2

22.0

315,052.2

17.7

Nokia

333,938.0

19.1

422,478.3

23.8

Apple

130,133.2

7.5

89,263.2

5.0

ZTE

67,344.4

3.9

56,881.8

3.2

LG Electronics

58,015.9

3.3

86,370.9

4.9

Huawei Technologies

47,288.3

2.7

40,663.4

2.3

TCL Communication

37,176.6

2.1

34,037.5

1.9

Research In Motion

34,210.3

2.0

51,541.9

2.9

Motorola

33,916.3

1.9

40,269.1

2.3

HTC

32,121.8

1.8

43,266.9

2.4

Others

587399.6

33.6

595886.9

33.6

Source: Gartner (February 2013)

I have listed out only some of the major Android players in the global market. There are many more companies which are producing or branding smartphones based on Google's operating system. The US search giant has managed to cleverly level the playing field between its major competitors such as MSFT and Apple & its partners such as Samsung and HTC. Nokia has become an unwitting casualty of the fight between these technology giants.

How Nokia is Fighting Back

Asha Phones -Nokia is fighting back through its Asha range of phones, which are targeted at the mass lower end segment of users in the emerging markets. Asha phones have made the competitors wary as they offer a lot of useful features such as cameras, Wi-fi etc. at low price points. The good design and quality of phones has even attracted customers who could potentially buy higher priced phones. Nokia has a reputation of building very good quality and durable mobile phones.

Nokia's latest Asha 310 phone is quite impressive with Wi-fi, 2 mp camera, 3 inch capacitive touch screen and 4 GB of memory. All this comes at a price of just ~$100 and has dual sim support (an important consideration in many countries).

Lumia phones - Nokia is becoming very aggressive with its Lumia range of phones and is targeting a wide variety of customer segments in the middle and upper end price range. The success of Lumia phones will only be known after a couple of quarters, seeing the sales trajectory. But Nokia phones with their features and price are very competitive with the Android phones, from premium vendors such as Samsung and LG. The biggest attraction of Nokia phones will be the availability of familiar windows applications and interface. Nokia is launching the Nokia 620 which is the lowest price Lumia phone at a price of $250. Nokia has loaded enough features in the phone to make it competitive with the Android clones in the $200-$250 range.

Stock Price and Valuation

Nokia has been mostly trading in the $3-$4.5 range for the last 3 months. Nokia's valuation is quite cheap with a P/S of 0.4 and P/B of 1.4. The company has stopped giving dividends, as the company is now fighting to retrieve its lost market share and profits in the mobile industry.

Summary

Nokia is fighting back against the Android invasion (~70% of the global market currently) by introducing good products at competitive prices. The company is being ably supported by Microsoft which desperately needs to get a foothold in the smartphone and tablet markets. Nokia will benefit from being distinct from other smartphone vendors which have the same operating system. While the fight against the Android clones won't be easy, Nokia's current valuation is quite low in our view. Investors do not have a lot to lose by buying Nokia stock at the current price.

Source: Nokia Fights The Attack Of The Android Drones