Seeking Alpha
Long/short equity, deep value, special situations, growth at reasonable price
Profile| Send Message|
( followers)  

By focusing its marketing dollars on emerging markets, Nokia (NYSE:NOK) is able to achieve great Lumia sales in Q1. Nokia is on track to make a great turnaround because it has abandoned flagship stores in favor of hitting the road and connecting with people on the street and in malls. By removing boundaries that separate their team from potential purchasers, Nokia is able to sell 27% more Lumias this quarter as compared to the previous quarter.

While many Seeking Alpha articles focus on numbers, my argument below will be a balanced view on the business as it supplements numbers with pictures and videos showcasing Nokia's team at work.

Nokia: West Meets East

By targeting the fastest growing middle class population (which is located in the Asia-Pacific), Nokia can quickly take back the crown from Samsung (OTC:SSNLF) and best position itself for the next decade. Much as we like to think that North America and Europe are the center of the universe, our world is growing more interconnected each day and we are dependent on the consumption of the growing middle class in places like India and China to boost our economic well-being. By examining a presentation found on the World Bank's website, one is able to see that the future is in the East.

Of particular note are slides 10 to 21, which looks at population growth and change from 2009 to 2030, and can be summarized as follows:

  • India, China, and "Other Asia" is accounting for the greatest growth in the middle class.
  • North America and Europe's middle class will shrink.
  • Currently, 90% of China's population is still poor, and 10% are middle class or wealthy. By 2020, a little under 60% is poor, leaving approximately 40% to be middle class or rich. By 2030, under 30% will be poor, and 70% rich.
  • By 2020, the largest middle class will be in China. The US will move down one spot and become #2.
  • By 2030, the largest middle class will be in India. China will be #2 and US will be in 3rd place.
  • There is a distinct correlation between the rise of the middle class and a dramatic increase in consumption.

Further to the argument that focusing on emerging markets is the right decision, the following population figures have been obtained from countrymeters.info for comparative purposes:

Country and Population

CountryPopulation
United States318.6 million
United Kingdom63.0 million
France63.6 million
Germany81.8 million
Japan125.8 million
China1.3 billion
India1.2 billion

Given China's population is over 1.3 billion and India's is over 1.2 billion, it makes tremendous "cents" for Nokia to focus its limited budget on the emerging markets. There are more people to influence every day and even if only 1% of the population makes a purchase each quarter, that's 25 million phones sold in just China and India combined!

When only the Lumia 920 was available, only the upper middle class and the rich were able to purchase the phone. Now, with a fuller line of Lumias, and with the 520 and 720 on the market, Nokia is able to reach a wider selection of people at various income levels.

While North American blogs and newswires keep hammering on about how the marketing is left to the sidelines in the United States to the likes of Verizon (NYSE:VZ), AT&T (NYSE:T), and Microsoft (NASDAQ:MSFT), we must realize where the real action needs to take place. Q1 was 27% growth for Lumia. For Q2 to be greater than 27% growth, the focus needs to continue to be Asia. It is the quickest way for Nokia to make a comeback. Good thing Nokia gets it.

"A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be."

-- Wayne Gretzky

After the earnings report came out [see transcript], Nokia's stock took a nosedive, recording a drop of over 11%. The drop is largely due to an expectation of a profit and not smaller losses. Then again, the fear of being on a sinking ship can play a part: the wave of negative information from the media sometimes can be overwhelming. In North America and Europe, I believe the fear factor is enhanced by language and cultural barriers. Given Nokia is a Finnish company doing most of its business in emerging markets these days, it may be hard for shareholders to really get a grip on what direction the business is headed for - up or down.

Information Asymmetry and Fear

While the stock trades on the Helsinki and the New York Stock Exchange, it does not trade on the Shanghai Stock Exchange. While Nokia is making progress with the Lumia sales, the information we receive in the West is either slow to arrive or received as suspect. When an investor has trouble trusting the source of information, it is hard to stay long a stock. It is tough to picture Nokia as making a successful turnaround when you cannot read Hindi, Chinese, Vietnamese or Filipino. A lot of information will not come through on a Google or Bing search when you cannot key in the request in a particular language. When NOK does not trade on the Shanghai Exchange, it is impossible for everyone to confirm that yes, Nokia is getting a good response in the Pacific. There is no corresponding daily uptick to sooth our anxieties. Hence, something like the closure of Nokia's Shanghai flagship is received as suspect - bad news.

From Brick and Mortar to Web and Street

Our times are changing. Many people shop online after playing with an electronic at a brick and mortar like Best Buy (NYSE:BBY). That is the same in China as in Canada and the United States. It's a worldwide phenomenon. Nokia's closure of the flagship Shanghai store does not mean it has lost all presence in China. Customers are directed to a nearby Nokia Experience Center. These places are staffed with knowledgeable employees who are there to answer questions and not pressure you to buy. They are not directly selling you anything. For that, they will direct you to a number of other places - including online. While there is only one flagship store left in the world and it is in Finland, my research shows that Nokia Experience Centres are found all over the world and they are there to assist potential buyers in making the switch.

Even more encouraging, with the demise of large monolithic money burning flagships, there is more ways to connect with buyers:

  • By setting up roadshow style, Nokia can take over a large part of the open space at a mall and attract attention by catching the eye of curious shoppers.
  • It can get some wheels and move the marketing team from one part of the city to another, or across an entire country.
  • And it can connect better with customers as each team can be scaled up to suit the situation. As an example, the Hong Kong team has 8 people while the South African marketing team has 26 as per this group photo.

I am of the belief that we do not need to know the languages of the world to find positive indicators of a successful turnaround in progress. The information is hidden in plain sight on Facebook.

Nokia on FB: From A to Z

In addition to locating the awesome photos above, I have attempted to check out how much attention (or "Likes") Nokia is getting. The Finnish company's main Facebook page only shows 10 million "Likes." I will be honest: I was disappointed when I first saw this number. By comparison, BlackBerry (NASDAQ:BBRY) was at 20 million "Likes" when I first visited and it is now sitting with 26 million "Likes." But wait - Nokia has so many other pages run by the company (and a few that look like they are run by fans) and they target different phone models, different regions, and different countries. I went and searched Facebook from A to Z to see how far reaching Nokia really is and was pleased to see "Nokia A" brings up results such as Nokia Asia, Nokia Australia, Nokia Azerbaijan/ Mobitel, and Nokia Asha 305. Going through the alphabet brought up items like Nokia Battery Monitor and Nokia Snake. It also brought up Nokia E7, Nokia House, and Nokia Jordan. There was Nokia Kuwait, Nokia Lumia 920, Nokia Lumia Lovers, and Nokia Future Talent. A tally of all the "Likes" on all the pages came to 32,235,282. That's a lot of buzz around just one company.

The Momentum is Building, The Tide is Turning

As the Q1 results indicate, Lumia sales went through the roof and hit a new record with 5.6 million sold and a 27% increase from the previous quarter. Losses are also slowing. Nokia's phone sales actually increased from Q4 2012 to Q1 2013. By comparison, Samsung's phone sales from Q4 to Q1 went down. Although Samsung is not scheduled to disclose its full Q1 results until later this month, their earnings estimate provides plenty of food for thought. As the Korean corporation has been relying on phones for over 70% of its profits since 2012, it is possible to notice that Samsung's mobile phone sales are under threat from Nokia and BlackBerry as these two companies make a reappearance with new products.

The Lumia and Galaxy Wars

While Lumia is the game changer for Nokia, it is taking away from Samsung's profits.

As you will see, Samsung is still making an incredible profit, but at a slower pace. It is no longer doubling when comparing one quarter to the same quarter in a prior year.

Samsung's Profits Showing a Downward Momentum

QuarterProfit Increase
Q1 201298%
Q2 201278%
Q3 201292%
Q4 201289%
Q1 201353%

Nokia is HERE to Stay... and Play!

Nokia is the oldest of the mobile phone players and has been around since 1865. It has gone through many tough times and proven its resilience. It transforms and adapts - from rubber boots to paper and tires - to mobile phones and communication networks. It has taken the crown in mobile and lost it. And regained it. Of all the mobile phone companies, it is the only one with the most number of #1 best selling phones.

  • On Wikipedia's list of all-time best selling phones, Nokia appears 20 out of 50 times. It totally decimates the competition.
  • If you need further convincing, the UK Telegraph has a list as well, and Nokia appears 11 out of 20 times. Of the list of 20, the all-time best selling phone is still a Nokia at #1 (the 1110 sold 250 million).

Nokia's strength is definitely in selling phones in great numbers. It can scale up and produce phones faster than the competition in order to meet demands. Of late, there is concern that Nokia's demand may be on the decline. The Asha phones seem to fail to attract enough buyers even though they are geared towards the lower income population. This goes to show that everyone the world over looks at phones as a status symbol and greatly crave a smartphone. Luckily, the Lumia comes to the rescue. I am confident that with Lumia's recent positive sales surprise, we will be in for a treat. We just need to be patient.

Over the years, Nokia has captured the minds and hearts of many. For years, it has been well-known as the brand that makes phones with high standards of quality control and testing. Nowadays, it is also known as a fun company that hosts an event with great music. The future is in the hands of youths and by capturing the attention of the next generation, Nokia can own future sales streams - be it phones, online apps, or music. Each year since 2011, Nokia has been partnering with deadmau5 to make a splash when it launches yet another innovative phone. I would expect that we are in for another show-stopper this year - and maybe that is a phenomenal phablet and maybe it is a 41 giga pixel phone - something beyond our imagination! This company has never ceased to surprise as its R&D is well-known for being top notch.

While some have accused Nokia of not marketing enough or spending too much time focusing on "The Tiles," I find the company is more thoughtful and intelligent in its efforts than first meets the eye. As some say, still water runs deep. This company can appear very secretive and full of surprises. It is working hard to sell the phones. Over the years, people have bought other phones... but inevitably, they have returned to purchase yet another Nokia. Hence, I am looking forward to the return of Nokia as king of mobile.

Source: Nokia As Comeback King: Using A Grassroots Approach To Win