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Nokia's (NYSE:NOK) stock witnessed a sharp correction after the company saw a decline in revenues and unit shipments post 1Q13 results. Nokia's feature phones saw a decline in shipments which led to the decline in revenues. On the other hand, the company was quite successful in increasing the shipments of its Lumia range of WP 8 smartphones, which crossed the 5 million mark for the first time during this quarter.

Nokia also managed to cut operating expenses in the current quarter, leading to an improvement in margins despite the lower revenue base. Its telecom equipment arm, Nokia Siemens Networks (NSN), also continued its turnaround with the NSN posting a ~$4 million profit in the current quarter. I think that the company is executing decently in its restructuring strategy, with most segments showing improvement.

While the feature phone segment showed a sharp deterioration in shipments and ASP, Lumia smartphones showed a 27% improvement in shipments. Nokia's future will depend mostly on how it performs in the smartphone segment, as the feature phone category is declining rapidly all over the world. Smartphones are becoming cheaper and increasingly affordable, and this is quickly making feature phones obsolete. Lumia is the "make or break" product for Nokia, and the current quarterly shipment growth was encouraging. Nokia's current stock price and valuation implies that the market does not think that the company can turn around successfully. I hold a contrary opinion and think that the stock is a steal at the current price.

Why Lumia could become a roaring success

I was quite impressed with the current WP 8 Lumia range which covers a wide variety of price points. These smartphones are very competitive with Android phones in the same price range, offering equivalent, if not better features. Nokia has been a bit slow in launching the Lumia range, with only its flagship Lumia 920 available in the last 6 months. However, Nokia is now starting to launch the lower priced WP 8 Lumias now, and they are excellent smartphones in my opinion. The lowest price Lumia 520 is a great 4 inches smartphone offering the WP 8 operating system with free Office applications.

1. Durability and Reliability - Nokia has a well-earned reputation of making mobile phones which last for a long time. While smartphones made by HTC, Samsung and others crack easily after falling, Nokia phones are much more durable and reliable. Nokia's build quality is quite superior compared to the other mobile phones. The durability of Nokia devices is a key advantage and Lumia phones look great.

2. Quality - One of the main advantages that Nokia mobile phones have over other phones is that the quality of the devices is much better. The quality of the components such as display, casing etc. is much better than mobile phones sold by the other vendors. Nokia does not cut corners with cheap components.

3. Great features - Nokia is offering great features with its Lumia range, such as a good camera functionality, nice displays, free music, excellent offline navigation etc. The Lumia phones are a complete package and it is difficult to point out any missing feature in these phones.

4. Office and Windows - The Lumia phones have Microsoft Office applications pre-installed. Lumia smartphone gives the ability to open and edit Microsoft (NASDAQ:MSFT) Word and Excel documents. This feature will make it very attractive to the corporate professionals who are used to Windows software.

5. Different price points - While Nokia only had one Lumia Windows 8 smartphone in the ~$700 category, now Nokia is offering a number of Lumia WP 8 smartphones with price tags of ~$200,~$250,~$300 and ~$400 respectively. The cheapest ~$200 Lumia 520 is an excellent device and should be a blockbuster phone in my view.

6. Lumia sales will accelerate in 2Q13 - The management was upbeat about the Lumia products and indicated that Lumia sales (up 27% this quarter) will accelerate in the second quarter of 2013.

In Q1, our Lumia volumes increased quarter-on-quarter to 5.6 million units, and approximately two-thirds of our Lumia volumes were our Windows Phone 8 based devices. With the broad portfolio of Lumia devices covering a wide range of price points, we are seeing our Lumia momentum accelerate as we exit Q1. Thus supported by the wider availability of recently announced Lumia products and the easing of supply constraints, we expect sequential volume growth in Q2 to be even higher than the 27% sequential growth we saw in Q1.

7. Small Base - Nokia used to be a leader in the smartphone category a few years ago, however the advent of touchscreen phones led to a sharp decrease in its market share. The company's decision to abandon the Symbian operating system led to a sharper fall, and the company does not rank even among the top 5 smartphone vendors now. However, this is a great opportunity for Nokia, as it has to grow from a small base. Apple (NASDAQ:AAPL), on the other hand, has a very difficult job in increasing its market share given it already commands a ~22% market share.

Top Five Smartphone Vendors, Shipments, and Market Share, Q4 2012 (Units in Millions)

Vendor

4Q12 Unit Shipments

4Q12 Market Share

4Q11 Unit Shipments

4Q11 Market Share

Year-over-Year Change

1. Samsung

63.7

29.0%

36.2

22.5%

76.0%

2. Apple

47.8

21.8%

37.0

23.0%

29.2%

3. Huawei

10.8

4.9%

5.7

3.5%

89.5%

4. Sony

9.8

4.5%

6.3

3.9%

55.6%

5. ZTE

9.5

4.3%

6.4

4.0%

48.4%

Others

77.8

35.5%

69.2

43.1%

12.4%

Total

219.4

100.0%

160.8

100.0%

36.4%

What could go wrong with the Lumia Story?

  1. Marketing - Nokia and Microsoft are not being aggressive enough in their sales, and as compared to Samsung and Apple, marketing, in my view. While it is early days for the new Lumia smartphones, the advertising has not been good enough. Microsoft has huge resources and should use some of that to push Nokia's Windows smartphones. Having great smartphones will not help if people do not know about them.
  2. Competition is not sitting idle - Strong competitors like Samsung (OTC:SSNLF), LG and Sony (NYSE:SNE) are not sitting idle and are pouring money into new products and advertising. Samsung will launch its new flagship smartphone S4 at the end of this month, while Apple will be coming out with a successor to the iPhone 5 in the next couple of quarters. Nokia has a small window to make its presence felt.
  3. Microsoft-Nokia partnership - Microsoft is facing issues due to the soft sales of Windows 8 and has been forced to improvise its OS strategy. Nokia has put all its eggs in the MSFT basket and is now dependent on MSFT for most of its software needs. Nokia is selling most of the Windows based smartphones now as major mobile phone makers like Samsung, HTC are concentrating more on Android products. Both the companies need each other to survive the "post-iPhone' world. However, I am yet to see the full potential of the partnership being realized.

Stock Price and Valuation

Nokia has hit the bottom of the $3.0-$4.6 range in which it has been trading for the last 3 months. Nokia's valuation is quite cheap with a P/S of 0.3x and P/B of 1.1x. The company has sharply reduced expenses over the last year, as it restructures to face heightened competition in its core mobile device market. I think that Nokia's valuation is very attractive at the current stock price considering that the company is net cash positive and has great assets. The company is earning more than 600 million dollars by licensing its patents. The company's 50% equity stake in NSN is also increasing in value, as NSN is succeeding in improving profitability. Google's acquisition of Motorola was made primarily for its patent portfolio. Nokia has a market value of just $11.5 billion and should be valued at a higher price given that Google bought Motorola for ~$12.5 billion.

Summary

Nokia is fighting against a range of strong competitors in the burgeoning mobile devices market. Despite the strong competition existing in the smartphone market, new players like Alibaba, Amazon (NASDAQ:AMZN) and Facebook (NASDAQ:FB) are not shying from entering the market. Smartphone shipments will exceed 900 million units in 2013, making it the most important competing category. No technology company can afford not to have a mobile strategy. Nokia has been slow to react to the sharply increased competition in the mobile phone market. However, the company has made decent progress in its restructuring strategy The company still needs to do a lot more by introducing a tablet and becoming more aggressive in sales and marketing. The quarterly results were not great, but they showed glimpses of hope with Lumia sales increasing. I think the current crop of Lumia smartphones has a good chance to succeed. Nokia's current stock price and valuation is quite depressed and offers a good risk reward profile in my opinion.

Source: How Lumia Could Light Up Nokia's Fortunes