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Nokia (NYSE:NOK) made a major strategic move by jettisoning its Symbian OS and signing a deal with Microsoft (NASDAQ:MSFT) to sell smartphones based exclusively on the Windows OS. The "burning memo" event caused a dramatic decline in Nokia's stock price as customers started avoiding Symbian smartphones. Nokia's smartphone market share has declined to less than 5%, compared to the 40 percentage plus market share during 2008. Nokia has undergone a massive reorganization in the past couple of years firing thousands of workers and selling its HQ in Finland. The results of the restructuring are now starting to bear fruit as Nokia's Lumia handsets are getting great ratings and showing a sharp growth. Nokia's Lumia Windows based smartphones are now so good that the other handset makers such as HTC (OTC:HTCCY), Samsung (OTC:SSNLF) etc. have stopped putting money into Windows based smartphones. However, Nokia has come under criticism for not selling Android phones and some analysts are suggesting that Nokia should start selling Android phones to survive. I don't think it's a good move and Nokia should stick to its existing Windows strategy. Nokia has some tremendous strengths and I think that the stock is undervalued.

The arguments for Nokia selling Android smartphones

Our second conclusion is about how Nokia should consider it's near term future. The company is facing two structural challenges: its exposure to the disappearing feature phone market and the lack of traction of Windows phones. Both could cost Nokia a lot of cash in the near term, in restructuring, marketing / distribution support, and operational losses, which means it could be too late to address the problem in a couple of years. From that perspective, a decision concerning a new platform strategy appears urgent. Better to take the pill before one cannot afford to do so anymore. We wouldn't be surprised to see Nokia adopting Android as its new low-end platform by year end.

Source - Barron's

  1. Windows based smartphones are costing extra marketing expenses and not getting traction - Analysts are arguing that Nokia's Windows smartphone are not gaining much traction and that the company has to spend too much on marketing and royalty payments. The company is losing market share in the feature phone segment from low-end Android smartphones. However, these arguments do not seem to hold much water. Nokia has carved out an important niche in the smartphone market with its Lumia range. Most of the Android companies have not been able to do that and everyone seems to be selling commodity Android smartphones. Top companies such as Samsung have been forced to discount their smartphones as local companies such as Micromax, Coolpad etc. are offering great hardware at wafer thin margins. The brand value of the Tier 1 companies cannot alone compensate for the major price difference in these smartphones. Nokia on the other hand, offers a very different experience in terms of its exclusive apps such as Here Maps, Nokia Music etc. The free Microsoft Office also gives it an edge over the Android eco-system.
  2. Asha phones are not selling well - Nokia's Q113 results were bad mainly due to a sharp decline in shipments of its feature phone segment. The company has been trying to rejuvenate this segment by introducing new Asha phones such as Asha 201 and Asha 501. The feature phones helps Nokia distribute its marketing and R&D costs over a larger revenue base. BlackBerry (NASDAQ:BBRY) is facing difficulties as it cannot match the marketing muscle of its principal competitors such as Apple (NASDAQ:AAPL) and Samsung. The global nature of the mobile phone market requires a huge marketing network, which small players cannot afford. Nokia has an entrenched distribution network and has got great brand recall in the main emerging markets such as China and India. Cheap Android phones from Samsung and small companies are eating Nokia's feature phone sales. However, arguing that Nokia starts selling Android phones would not help, as the margins in this category are negligible and Nokia will lose its differentiation. A better strategy will be to come out with a low cost stripped version of Windows phone for this segment. The Nokia Lumia 520 has been a tremendous success because it offers mid to high end smartphone features at a low end smartphone price. Nokia could enter a pact with Microsoft to sell a light version of Windows smartphone for the low end segment. Customers value brand and reliability and I think that Nokia can replicate the Lumia 520 success here as well.
  3. Nokia has got a weak balance sheet - This is another argument that I totally disagree with, since selling Android smartphones cannot do anything to help Nokia's balance sheet. Nokia is already spending a lot of money on developing software and services for the Windows 8 ecosystem. The company is also readying itself to launch a major marketing campaign along with Microsoft. A complete turnaround in this strategy will require a lot of money as it will write-off the Windows development expense and spend money on developing Android phones. The balance sheet of Nokia will weaken from the change in strategy at this point.

Why Nokia should not go with the Android strategy

I have already countered some of the main arguments for Nokia selling Android smartphones. The other major strategic reason for not going with Android is that hundreds of device makers are already selling smartphones based on the Android OS. The free Google (NASDAQ:GOOG) OS has made it possible for many small hardware companies to enter this technology segment. Even big companies such as Samsung, LG (NYSE:LG), Panasonic (OTCPK:PCRFF), Lenovo (OTCPK:LNVGF), Huawei etc. are selling smartphones based on the Android OS. It is difficult to differentiate between the products sold by these companies, as the software and customer experience remains almost the same. Though these companies are trying to stand out by putting in new skins and services, they only bloat up the OS and make it slow. In fact, the pure Android experience is preferred by a lot of customers. Becoming another Android company will not help Nokia in my view and will reduce its current value. Nokia has become essential for Microsoft, which desperately needs to increase its OS market share in the mobile devices market. Android companies such as Huawei and others are also eyeing Nokia to gain an edge in the mobile devices market.

Stock Performance and Valuation

Nokia's stock has recovered sharply after falling to $3, after reporting its Q113 results. I think that positive news around Lumia phones and the buying of the Siemens (SI) stake in the NSN at a cheaper than expected price could be the reason. Nokia is quite cheap with a P/S of just 0.4x and trades more than 90% below its all time peak. The company's current market capitalization is $14.5 billion, which is very cheap if you consider its huge patent portfolio, Nokia Siemens Network stake and its brand value.

Summary

I think Nokia has done a good job in radically changing its strategy in the face of the changed mobile device market. The company is effectively fighting the attack of the Android clones with its Lumia range of smartphones. I think that the Nokia smartphones are great products and offering really good value at the current price points. To start selling Android smartphones does not make any sense in my view. Every Tom, Dick and Harry is selling smartphones and now even HP (NYSE:HPQ) is thinking of entering this space (I think they too will go with Android, given the failure of the Palm OS). Nokia should continue to execute on its Windows strategy. I remain positive on Nokia's stock as I think that the market is not adequately pricing the stock, given its assets and improving performance.

Source: Why Nokia Should Not Go Towards The Dark 'Android' Side