Lumia Strength Is Being Underestimated

May.30.13 | About: Nokia Corporation (NOK)

Nokia (NYSE:NOK) has seen its stock price stagnate after it reported a bad set of Q1 13 results. The company's feature phone category showed a sharp decline in shipments which led to a decline in the stock price. However, the one redeeming feature in the Q1 results was the strength in its smartphone shipments. Nokia is currently undergoing a major business restructuring like BlackBerry (NASDAQ:BBRY). Both the companies were caught unaware by the rapid change in the mobile devices market with the advent of Apple (NASDAQ:AAPL). While BlackBerry has managed to execute quite decently in its turnaround, Nokia is still trying to catch up. Nokia saw its Lumia range of smartphones cross the 5 million mark in the last quarter and expects the shipments to show a sharp growth in the coming quarters. The positive Lumia reviews and indications from top e-commerce retailers make me think that Nokia may surprise on the upside with its Lumia shipments in the coming quarters. Nokia is also resurrecting its feature phones segment with the launch of new Asha phones in order to fight the low cost Android phones. The company recently introduced email Exchange support for some of its Asha phones. Nokia's current stock price and valuation implies that the market does not think that the company can turn around successfully. I think that Nokia remains a good buy at the current price due to low valuation.

Nokia's Lumia phones are becoming Bestsellers

I have been following the bestseller phone categories of popular e-commerce websites in India quite closely in the last few months. Nokia's 520 Lumia smartphone has become a bestseller in two of the most popular websites - Flipkart and Snapdeal. Nokia's 520 is the company's lowest price Lumia smartphone with a price of ~$170-180. Despite its low price, Nokia is offering a wide variety of features with the phone. The device has a 4 inch screen with a WP 8 operating system. The design of the phone oozes class as compared to similarly priced Android smartphones which look cheap. Nokia is providing some decent hardware as the lower priced Lumias have a dual core Qualcomm (NASDAQ:QCOM) Krait processor with 512 mb RAM. Though the hardware specs of 520 are lower than that of similar phones sold by local and international competitors like Micromax, Lava, Spice, Samsung (OTC:SSNLF), the performance of 520 is extremely good and shows no lag.

Nokia really shines with the software it is giving with this budget smartphone. While Microsoft critics keep harping on the app shortcomings, I do not think it is a problem. All the major applications like WhatsApp, Viber, Tumblr, Skype, Facebook, Twitter etc. are available on WP 8. The icing on the cake is Nokia's own apps, such as Nokia Music, Here Maps and Drive. Nokia also has better calling quality and imaging features as compared to its competitors. Nokia has the reputation of producing reliable and durable products.

Nokia has a Lumia for every pocket

While Samsung has saturated the market with almost 30 smartphones, Nokia has kept it simple by selling only 5 WP 8 Lumia phones ranging from ~$170-$600. Each of the Lumia phones appeals to a different price segment with better features than a lower priced Lumia phone. For example, the Lumia 620 has a better imaging ability and display than a 520. I thought the only weak phone in the Lumia lineup was the Lumia 920 which did not really offer better features over the Lumia 820 for the price difference. Nokia has recently slashed the Lumia 920 price which should allow it to better compete in the market. I think Nokia has the first major blockbuster smartphone in the form of Lumia 520.

Lumia Risks

  1. Absence of large screen size - Nokia like Samsung tries to cater to the needs of the entire mobile device market, while Apple, HTC and BBRY focus only on the smartphones category. Nokia's business model is based on being a one stop shop for all mobile device users. Consumer preferences are shifting towards large screen sizes and Nokia does not have a single device to meet this need. I have already pointed out that Nokia badly needs a tablet to fight aggressive players like Samsung. There have been rumors that Nokia is going to come out with a bigger mobile device. I think Nokia has to execute faster in launching bigger display devices as it risks losing a large number of customers to Samsung.
  2. Competition remains very high - The competition from Google's (NASDAQ:GOOG) Android ecosystem remains very high. Samsung is launching new phones almost every month with new features and software. It recently launched a ~$100 Galaxy smartphone to compete with higher end Asha phones. Samsung has also launched super size phablets like Galaxy Mega to satisfy customer needs for larger screen sizes. Local competitors like Micromax have done extremely well through their large distribution networks and strong sense of customer needs. The Canvas 2 A116 has been a huge success and Micromax is launching more mid segment smartphones. BlackBerry will soon launch its budget smartphone which will start competing with the lower priced Lumia phones.
  3. Windows 8.1 - Microsoft (NASDAQ:MSFT) is launching a new version of its Windows 8 operating system in late 2013. This will improve the mobile features of Windows OS by solving some of the issues being faced by users with the current Windows version. Execution delays might hurt Nokia as it is almost completely reliant on MSFT for its software needs.

Stock Price and Valuation

Nokia has not really participated in the strong rally in the broader stock market. The company's stock price has been stuck in the ~$3.5 range for the last month as investors are still not totally convinced about Nokia's turnaround story. Nokia's valuation is quite cheap with a P/S of 0.4x and P/B of 1.4x. Nokia's stock has the potential to multiply, if it manages to execute well in its current roadmap. The company has a long way to go in completing its turnaround as it lacks bigger display devices and a tablet. Competitors are nipping at Nokia's heels with faster product launches. However, the company has formidable assets in the form of its patent portfolio, brand name and manufacturing expertise. The downside is limited for Nokia as it has a market capitalization of only ~$13.5 billion. Google bought Motorola for ~$12.5 billion, which means that Nokia should find a buyer for at least $12.5 billion.

Summary

Nokia is showing urgency in its product launches and innovating with new software. The company foolishly gave up its No.1 position in a massive industry through slow execution and lack of innovation. The new management has performed quite decently, though they have made a couple of big mistakes. The Windows strategy is not bad given that the Android players lack differentiation. The new Lumia phones are providing very good features at extremely low prices. However, Nokia cannot afford to slow down as competition in the mobile devices field is increasing. The company's stock is undervalued in my view and is a good buy at this point.

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.