The year 2013 can be called a year of comebacks. We are currently seeing some of the most powerful brands in the market making a comeback. Nokia is one of the giants that are looking to regain their previous status in their respective markets. Nokia (NYSE:NOK) started its quest for revival at the start of the last year by introducing Nokia Lumia handsets, and the company reported sales of 4.4 million units of Lumia in the fourth quarter of 2012. Slowly, the company has started to show signs of a much awaited turnaround.
I am impressed by the new strategy of the company. As I mentioned in my previous article, the company will benefit from a focus on developing markets. Nokia has always been known for making a mobile phone for everyone. From a businessman to a student, everyone could afford a Nokia handset. Nokia's affordability was an important factor in making the company a global force in the mobile phone market. It is refreshing to see that the company has decided to apply the same strategy to its Smartphone segment as well.
Improving Margins, Market Share and Strategy
At the moment, Nokia's profit margin is around 2.5%. The company suffered losses for more than a year and the profit reported in the fourth quarter was the first in over a year. However, transition seems to be nearing completion. An increase in margins was mainly due to an increase in the sales of smartphones. For the first time in a year, the company was able to grow Smartphone sales. As a result of selling more smartphones, the average selling price of the company went up, which resulted in higher margins. There is still demand for Nokia's low-end phones; however, increased focus on smartphone market will be the main driver for the company. Nokia's margins for the current quarter might be lower than the last quarter. One of the key reasons for increase in margins was increased seasonal sales. However, I expect full year margins to increase during 2013.
China and India are two of the biggest markets for Nokia. At the moment, Nokia is losing market share and revenue in India. For the two consecutive years, Nokia has lost revenue in India, and lost the top spot. The company reported revenue of $2.87 billion, falling by 23% from 2011. However, decline in revenue was due to a combination of lost market share and currency fluctuations. India is a price sensitive market, and customers in these markets have an affiliation with Nokia. There is no doubt that there is immense competition in the market from local and international manufacturers. However, in my opinion, Nokia Lumia presents a better option than other low-end devices present in the market. New Nokia devices are trendy and affordable (here is a review of Lumia 620). By introducing smartphones for mid-level as well as high-end customers, Nokia will be able to recapture some of the lost market share.
On the other hand, Nokia holds almost 78% market share of Windows phones in China. Windows phones are hugely popular in China, and Nokia is in a strong position to exploit this market. This is where Nokia's cheap smartphones will play a vital role. Lumia and Asha series should drive future revenues and help the company regain market share from Samsung.
While valuing Nokia, we put too much emphasis on its mobile phone hardware segment. I do believe mobile phone segment is extremely important; however, it should not be the sole area that should be valued. Telecom equipment segment of the company (Nokia Siemens) is an important contributor towards the cash flows of the company. Nokia Siemens also performed better than expected in the last quarter. This segment of Nokia is currently the second biggest player in Europe behind Ericsson. At the moment, the company is looking to buy out the share owned by Siemens in the joint venture. Nokia Siemens has already held talks with Alcatel-Lucent (ALU) to buy out the share owned by Siemens.
Furthermore, Nokia has an extremely strong patent portfolio, which has allowed it to get royalties from its competitors. The company is monetizing its patent portfolio, which can allow it to enjoy healthy cash flows for years to come. As a result, these cash flows can account for a major portion of the total value of the company. Recently, the company won an injunction on HTC in Germany over battery saving wireless technology. Nokia's ongoing litigation strategy may well result in increased cash flows in share of royalties. In order to value Nokia properly, we should also take into account these two segments.
Nokia is making good progress on its turnaround. The competition is fierce in the market; however, the company is fighting its competition well on all fronts. Two segments of the company are doing well, and small growth from mobile phone segment will have an extremely positive effect on the stock price. I believe Nokia's turnaround will continue in 2013. The company has an extremely impressive patent portfolio and strong telecom equipment operations in shape of Nokia Siemens. Nokia might not reach the previous heights; however, the long-term future of the company is safe, in my opinion.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.