Nokia (NOK) has introduced the Nokia Lumia 925. The product showcases camera innovation and the next-generation software for quality images. The Nokia Lumia 925 is an interpretation of the flagship Nokia Lumia 920. In this article, I want to explain how the trend in the smartphone market will affect the sales of Nokia's new product. I especially want to show how the growing smartphone market will enable Nokia to generate good sales. This factor will make Nokia to improve its smartphone revenues by 2%.
Why will Nokia's revenues show improvement? Despite saturation in some parts of the world, the smartphone market is expanding. According to the International Data Corporation (IDC), vendors will ship 918.6 million smartphones in 2013. By December 2017, IDC says 1.5 billion smartphones will be shipped globally. Nokia will benefit from this trend through its Lumia sales. This will boost its smartphone revenues and improve the company's price multiples.
Nokia's sales growth is inevitable. Its Lumia portfolio has created a trend of increased sales in the past few quarters. In the first quarter, Nokia sold 5.6 million Lumias, up from 4.4 million in the previous quarter. Due to the rise in smartphone revenues, Nokia reported a higher net cash quarter-on-quarter basis.
"We have areas where we are making progress, and areas where we are further increasing the focus. For example, people are responding positively to the Lumia portfolio, and our volumes are increasing quarter over quarter," said Stephen Elop, Nokia CEO.
In the fourth quarter, Nokia sold 4.4 million Lumia smartphones, compared with 2.9 million in the third quarter. The product portfolio helped Nokia's Devices division to record improved quarter-on-quarter operating margin at 1.3% as well as decrease in operating expenses. Nokia achieved profitability with an operating margin of 7.9%.
"We are very encouraged that our team's execution against our business strategy has started to translate into financial results," said Elop.
Nokia has developed many strategies to gain traction with its Lumia-branded smartphones. The company updated and improved the body of the Lumia 925. Nokia ensured that its flagship Lumia Windows Phone 8 devices came to Verizon (VZ) and T-Mobile (TMUS). It packed the Lumia 900 with innovations such as the super-sharp touch-screen and light polycarbonate body. It included pure-view technology and a Carl Zeiss lens in Lumia 920. The company said that future Lumia smartphones might come with dual-SIM support.
The new Lumia 925 includes advanced lens technology and the new Nokia smart camera mode. The camera enables the capture of ten images at once and allows people to take and share pictures with enthusiasts globally. "We keep innovating," said Jo Harlow, executive vice president of Nokia's Smart Devices. "We're advancing experiences on the Nokia Lumia portfolio whether that means great new benefits for an existing Lumia owner, or bringing new showcase devices like the Nokia Lumia 925."
Now that sales of Nokia's feature phones are declining, the Lumia 925 is crucial to Nokia for revenue growth. Fortunately, the Lumia portfolio is proving popular with time. Nokia has sold 19.9 million Lumias since shipping the Lumia 800 in November 2011. The new Lumia will allow Nokia to gain a head start over its rivals.
When we take a look at the recent financial reports of Nokia, we notice that Lumia sales show quarter-on-quarter improvement. As a result of this, Nokia's Devices division showed growth in the fourth quarter. So it can be said that Nokia is making progress with Lumia.
With a price to sales ratio of 0.36, Nokia is trading cheaply, not surprising given its gross margin of 31.43%. The Lumia 925 will increase Nokia's smartphone sales, reduce the company's debt of $7.28 billion, and enable Nokia to achieve profitability.
With an EPS of -0.86, compared with 33.42 for Google (GOOG), 41.90 for Apple (AAPL), and 0.51 for Sony (SNE); gross margin of 31.43%, compared with 37.50% for Apple, 57.45% for Google, and 33.57% for Sony, Nokia appears to be behind its rivals. However, this is misleading. With a price-to-sales ratio of 0.36, compared with 2.47 for Apple, 5.42 for Google, and 0.25 for Sony, Nokia is no pushover. Sony's HTC One, Apple's iPhone 5, and Google's Nexus 5 will provide competition to the new Nokia smartphone. However, the Lumia 925 is unique because it represents an evolution over previous Lumia products and has extra glass lenses that are effective in low-light conditions.
Looking at the previous performance of the Lumia portfolio of smartphones and the growth prospects in the coming years, we can say the new product will increase revenues and improve Nokia's price multiples. Despite the company's debt and discouraging EPS, the prospect arising from smartphone sales makes us say HOLD Nokia for now.