In this article, a fellow Seeking Alpha contributor posits that investing in Nokia (NOK) is a losing proposition. Since opposing perspectives are what make a market, I would like to offer a different point of view. With Nokia's share price sitting at $3.40 (equating to a market cap of approximately $12.65 billion) as I write this, it seems a good time to discuss why I believe there is potential for upside for the patient investor.
Nokia - The "Rodney Dangerfield" of Smartphones
Many readers may remember the late, great comedian Rodney Dangerfield. Mr. Dangerfield made a living using his famous catchphrase "I don't get no respect!" In many ways, this catchphrase appears to summarize Nokia's position in the minds of many investors.
As one brief example, as featured by other fellow contributors right here on Seeking Alpha, Goldman Sachs (GS) recently downgraded the stock while at the same time holding over 109 million shares as of the end of Q4 2012. Cynical Nokia "longs" I read on, for example, the Yahoo Finance Nokia Message Board wonder how a firm can hold these two seemingly contradictory viewpoints.
Certainly, Nokia must be categorized as an underdog, particularly in the area of smartphones. On the upper end of the spectrum, Apple (AAPL) has established dominance. Via their Android operating system, Google (GOOG) has also developed a commanding presence in the marketplace. In fact, while Apple is still the #1 smartphone manufacturer in the U.S. (37.8% OEM market share), Android is now the #1 platform (52.3% platform market share). (Source: comScore January 2013 report) That same report shows Microsoft (MSFT), Nokia's partner, with only a 3.1% market share, and Nokia as a manufacturer does not even appear on the list.
However, there may be some reasons for hope. Using Nokia's latest Form 20-F, let's look at just a few. For the remainder of this article, I will share brief quotes and commentary, with page references to the 20-F. It is my hope to encourage the interested investor to investigate further for themselves, should that be their desire.
- AUTHOR'S NOTE: All figures reported in Euro in the 20-F have been converted into U.S. Dollars for this article at today's rate of 1.295 per Bloomberg.
Smart Devices and Mobile Phones
In the 20-F, Nokia distinguishes between Smart Devices and Mobile Phones. This is a nice reminder that, unlike Apple for example, they have a diverse line of mobile devices, at many price points.
Nokia has developed the Lumia line of smart devices using Microsoft's Windows Phone 8 (WP8) operating system. Why Windows Phone 8? On page 52 of the 20-F, Nokia offers this key reason:
With Windows Phone 8 and Windows 8 sharing many of the same core technologies, applications can more easily be ported between the two platforms compared to previous versions. We believe this will attract more developers and consumers who want a similar experience across their personal computer, tablet and smartphone.
Going on, amongst other things, they highlight the following benefits on page 53:
- NFC (near field communication) technology, multi-core processors and high screen resolutions
- The animated WP8 "live tiles" interface, which can be easily tailored to feature the information most important to the user
- Microsoft Office applications, including Word, PowerPoint, Excel and OneNote, which are all built into the platform
- HERE location-based products and services, including HERE Drive navigation
Ranging from the current flagship Lumia 920 all the way down to the recently-introduced Lumia 520, this line cuts across many price points while offering impressive functionality. While the processors, screen sizes and camera specs vary, all phones in the line offer the functionality mentioned above. For more specifics, please see my instablog on this topic.
At even lower price points, Nokia offers a robust line of mobile phones. These break down into three segments, as follows:
- First - Nokia's lowest-priced offerings. This includes the recently-introduced Nokia 105, which offers a bright color screen, FM radio and long battery life. It is available in various colors for a mere $19.
- Feature - This line includes the Nokia 206, which costs $60. This line targets consumers looking to connect to the Internet for the first time. If offers Internet connectivity, including Facebook and Twitter, and uses data compression to minimize usage charges.
- Smart - This is where we get into Nokia's Asha line. Here, the Nokia 311, with full touch capabilities and a 3.2 MP camera, retails for $119. In this line, users are exposed to a very smartphone-like experience at a very modest price point.
Summarizing their goals with respect to mobile devices, Nokia offers these comments on pages 87 and 88:
Through our partnership with Microsoft and development of the Windows Phone ecosystem, we are focusing more of our investments in areas where we believe we can differentiate and less on areas where we cannot, leveraging the assets and competencies of our ecosystem partners. Areas where we believe we can achieve sustained product differentiation and leadership include distinctive design with compelling hardware, leading camera and other sensor experiences and leading location-based products and services, in these areas we also hold IPR to support such differentiation. Other ways for us to differentiate our products include using our localization capabilities, global reach, brand and marketing. We expect to continue to introduce new and more differentiated products into our Lumia product family in multiple markets throughout 2013.
Additionally, we plan to extend our Mobile Phones offerings and capabilities during 2013 in order to bring a modern mobile experience - software, services and applications - to aspirational consumers in key growth markets as part of our strategy to bring the Internet and information to the next billion people. (Bold emphasis mine)
Finally, Nokia notes the targeted opening of their newest manufacturing facility in Hanoi, Vietnam, in the 2nd half of 2013. This site will produce their most affordable smartphones and feature phones. This should help Nokia compete with the growing threat from cheap Android-based phones.
HERE (Formerly Location and Commerce)
I will just offer brief comments here (no pun intended). In addition to the maps and proprietary navigation offered on Nokia's Lumia line, HERE also provides mapping and location-based services to other companies. These include multiple automobile companies as well as AOL (AOL) and Amazon (AMZN).
In terms of application for automobiles, the following comments appear on page 61:
HERE Drive, a dedicated in-car navigation application including voice-guided navigation in multiple languages for more than 100 countries, 2D and 3D map views and day and night modes. The latest iteration of HERE Drive includes features such as speed limit warnings even when the user is not using the application. During 2012, we also introduced the My Commute feature for HERE Drive. Available in 26 countries by the end of 2012, My Commute brings users real-time info on traffic flow and incidents on their regular routes.
NSN (Nokia Siemens Networks)
NSN is a leading global provider of telecommunications infrastructure. In 3G, NSN is the industry leader in terms of customers served, with more than 1 billion customers connecting through their networks. In 4G, NSN had 77 commercial contracts at the end of 2012. Included in their list of customers are mobile operators Bharti Airtel, China Mobile, Deutsche Telekom, Softbank, Telefónica, Verizon and Vodafone.
In the 20-F, they note the increasing competition in this area from companies such as Huawei and ZTE, low-cost vendors from China. In that regard however, I found this comment on page 64 most interesting:
In naming quality as the second pillar of its current strategy, Nokia Siemens Networks clearly stated that it wishes to make this area a competitive differentiator over time. The extreme intolerance of lapses in service of most mobile broadband subscribers and operators means that quality improvements have a direct impact on the reputation and success of network suppliers.
As the world gets more and more interconnected and Internet service over mobile devices gets more and more critical, "lapses in service" are not well tolerated.
Finally, I found this interesting note on page 63:
Beginning on April 3, 2013, certain restrictions on the transfer of Nokia's and Siemens' interests in Nokia Siemens Networks expire and certain other provisions relating to the transfer of such interests come into effect.
It would appear, then, that there will be more freedom to restructure, sell, or otherwise split off this business unit if it is judged that this would create value for shareholders.
Lastly, I would like to share this tidbit from page 110 concerning Nokia's patent portfolio:
During the last two decades, we have invested approximately EUR 50 billion ($65 billion) in research and development and built one of the wireless industry's strongest and broadest IPR portfolios, with approximately 10,000 patent families. We are a world leader in the development of handheld device and mobile communications technologies, which is also demonstrated by our strong patent position. Within Devices & Services Other, we estimate that our current annual IPR income run-rate is approximately EUR 0.5 billion ($.65 billion).
Elsewhere in the 20-F, it becomes quite clear that Nokia fully intends to do everything within their power to protect these patents.
Summary and Conclusion
Nokia stock has performed very poorly for the past several years. This comes as no surprise, as the company has lost market share, particularly in the critical smartphone market, to its competitors. Further, their struggles are by no means over. Look at these stats in their Smart Devices and Mobile Phones division:
Select Mobile Devices Data (2010 - 2012)
|Year -- >||2012||2011||2010|
|Units Sold (millions)||35.1||77.3||103.6|
|Average Selling Price||$201||$181||$186|
|Gross Profit Margin||8.80%||23.70%||30.80%|
|Units Sold (millions)||300.0||339.8||349.2|
|Average Selling Price||$40||$45||$51|
|Gross Profit Margin||23.40%||26.10%||28.00%|
However, the key to successful investing is to look. not at the past, but at the future. The past two years have been huge transition years for Nokia. They have migrated completely away from Symbian, their home-grown operating system, in favor of Microsoft's Windows Phone OS. In so doing, they have both aligned themselves with a powerful partner and lowered their own R&D expense, at least with respect to the OS.
Speaking of the Microsoft partnership, Nokia goes to great lengths in the 20-F to explain the risks involved, including that the partnership is not exclusive and that Microsoft could, among other things, elect to favor others. While this is the case, recent evidence points to the conclusion that Nokia is still a favored partner of Microsoft. An example of this is a recent Windows Phone 8 ad in which the Lumia 920's low-light picture quality is compared to that of Samsung's Galaxy S3. It is noteworthy that Microsoft chose to specifically feature a Nokia product in an ad that they funded.
In terms of Nokia's own expectations, here is what is presented in the 20-F. First, with respect to Devices and Services, from page 84:
Longer-term, we continue to target:
• Devices and Services net sales to grow faster than the market, and
• Devices and Services operating margin to be 10% or more, excluding special items and purchase price accounting related items.
Next, with respect to NSN, this from page 95:
Longer-term, Nokia Siemens Networks continues to target Nokia Siemens Networks' operating margin to be between 5% and 10%, excluding special items and purchase price accounting related items.
It is encouraging to note that Nokia managed to report an operating profit of $569 million and overall profit of $330 million in Q4 2012.
Admittedly, Nokia should likely be considered a speculative investment. The company still faces considerable headwinds. Nevertheless, if my thesis holds that they are deserving of greater respect than the market is currently showing them, patient investors may end up with a portfolio that is also worthy of respect.