Why Nokia Cannot Afford To Miss The Tablet Bus

Apr. 1.13 | About: Nokia Corporation (NOK)

Nokia fighting to stay relevant in the post-iPhone world

Nokia (NOK), which used to be the undisputed leader of the mobile devices market is fighting to stay alive in the post-iPhone world. The Finnish technological giant has seen its revenues and profits plummet along with its market share, as new entrants like Apple (NASDAQ:AAPL) have completely changed the mobile device market. Nokia has never been too successful in responding to the changing trends in the technology industry. It missed out on the craze for "clamshell" phones which gave Samsung (OTC:SSNLF) a foothold in the mobile phone market. The blunder with the "touchscreen" feature was much bigger and resulted in Samsung becoming the world's No.1 mobile company. The most successful companies in the mobile devices market are Samsung and Apple. Both companies not only have smartphone products but also very successful tablet products. Nokia is not a niche mobile player like BlackBerry (NASDAQ:BBRY) but has mobile products for all segments of the market. Not having a tablet is a glaring gap in its portfolio. I don't think that Nokia can afford not to have a tablet product considering the size and growth of the tablet market.

Nokia has made some painful decisions but needs to do more

Nokia has made some very difficult strategic decisions in recent times, such as abandoning its Symbian operating system and going exclusively with Microsoft's (NASDAQ:MSFT) operating system for its smartphones. However, I feel that Nokia needs to make more strategic changes such as entering the tablet market. The company needs to get into this space quickly to protect its position in the overall computing market.

Nokia stock price presents a good entry point after a 30% decline

The company's stock had gone up by almost 150% after touching its all time low in 2012. The stock has pulled back by ~30% from its 52 week high which presents a good opportunity to enter the stock.

Why Nokia must enter the Tablet Market

  1. Computing boundaries are collapsing - In the old days, PC and mobile phones were distinct segments with different technologies and players. There was hardly any company that used to operate in both segments [Sony (NYSE:SNE), HP (NYSE:HPQ)]. Mobile devices with computing abilities approaching those of PCs were a very small niche segment (PDAs). However with advancement in semiconductor technology, smartphones have come close to PCs in processing power. Apple's iPad has also given rise to an entirely new computing class of products. Tablets have seen a massive growth in the last 3 years and their sales will reach almost ~200 million in 2013. Samsung also blurred the lines between smartphones and tablets with the introduction of "Note" phablets. Now there are a number of flagship smartphones with screen sizes of 5.5 inches and even 6.1 inches. This comes very near to the size of the tablets with 7 inch screen size. It has become harder and harder to differentiate between smartphones and tablets. PC vendors are now coming out with PC-tablet hybrids, in order to stem the decline of PC sales. With Microsoft making Windows 8 much more touch and mobile friendly, major PC OEMS have come out with interesting new products based on the Windows operating system. It is becoming hard to differentiate between touch laptops and high end tablets with keyboards. Nokia cannot afford to restrict itself to smartphones considering that PC vendors are making inroads into the tablet/smartphone market. The 2nd largest PC seller Lenovo (OTCPK:LNVGF) is making an aggressive push into the tablet and smartphone space. HP is also thinking of re-entering the tablet market after its first entry (WebOS based tablets) was a disaster.
  2. Tablets are growing at an incredible rate - Tablets are one of the fastest growing technology segments in the market. 128 million tablets were sold in 2012 and IDC estimates that the market will grow by ~67% in 2013. This will exceed the growth rate of smartphones of ~28% this year. Apple managed to generate more than $10 billion in tablet revenues alone in the last quarter, which is more than Nokia's entire sales during that period. While there is stiff competition in the tablet market, Nokia has the technology, distribution and manufacturing capabilities to become a strong player in this market. The company will be able to expand its TAM considerably as the tablet market exceeds $100 billion in global sales this year. Even if Nokia captures 10% of this market, it will manage to increase its topline by 33%. These days most big smartphone companies offer a tablet including BlackBerry. To remain a viable player, Nokia needs a tablet product soon.
  3. Growing competition from other Windows smartphone vendors - While Nokia is restricting itself to the Windows platform, top mobile phone companies such as Samsung and HTC (OTC:HTCCY) are not bound by this restriction. These companies are introducing top of the line Windows based smartphones in addition to their strong Android lineup.

What is Nokia Management currently thinking about Tablets

While there have been rumors about Nokia testing a Windows 8 tablet, the company management has not announced any concrete plans. CEO Stephen Elop in a recent interview said that he was still watching how the tablet market was evolving with different technologies and platforms. While the company management recognizes the importance of the tablet market, it is still working out on how to differentiate itself from the rest of the market. While planning and thinking is necessary, Nokia might miss the bus on tablets if it waits too long. The company has a history of missing the bus a number of times on some important technology trends.

Stock Price and Valuation

Nokia stock has not been performing well in the last quarter and has declined by almost 30% from a peak of $4.7 reached in early January. The reason for the decline is growing competition with new flagship smartphones being introduced. Samsung's Galaxy S4 and BlackBerry's Z10 have been hogging the media headlines recently. At the current stock price of $3.3, I think Nokia is a good buy. Nokia trades at a P/S of just 0.3 and P/B of 1.2. The company's current market capitalization is only $12.36 billion with net cash of more than $5 billion.

Summary

Nokia has an uphill task as it fights with a number of top technology companies for smartphone market share. Despite taking a number of body blows in the last 2-3 years, NOK remains the second largest seller of mobile phones in the world. The company has made some painful changes in strategy in order to return to profitability. The company needs to do more as PC companies are also entering the smartphone market. As lines between smartphones and tablets get blurred, Nokia simply cannot afford not to have a tablet product.

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.