Nokia: From Survivor To Challenger

Jul.22.13 | About: Nokia Corporation (NOK)

Lately, Nokia's (NYSE:NOK) management has been projecting strong smartphone sales volume.

Curiously, otherwise bearish sell-side analysts foresee sales well above what management expects. If they mean thereby to create a "disappointment", they sure do a good job.

This tactic is the opposite of what we are seeing everywhere else, i.e. analysts lowballing forecasts so as to create a "better-than-expected" bounce.

NOK's guidance was for 27% volume growth for smartphones (the Lumia series) in Q2. Analysts raised the bar at +42%. The actual number was 32%. Initially the stock sold off on a "miss."

The difference this time is that the stock snapped right back.

Could it be the market "understood" that Lumia sales of 7.4 million in Q2 is good, it is up and showing a strong recovery trajectory?

Furthermore, the very successful Lumia 520 and 720 series only hit the markets in the middle of the quarter.

In Q3, the momentum for these phones should carry Smartphone sales closer to the 10 million mark, which is assumed to be the breakeven point. More products are coming to the market. Nokia is launching its new, potentially game changing Lumia 1020 at the end July and "Big" news has been announced for July 22.

Sales of cell (non-smart) phones was still weak in Q2, although the market is stabilizing. Here too, Nokia introduced new products that are taking off (several feature "Asha" phones).

The cheapest Asha phone sells for $20 and has a $5 profit margin (according to one analysis). Who says Nokia cannot compete with Chinese manufacturers? Would one rather buy a quality Nokia phone at $20 or pay the same amount of money for some Chinese junk?

Feature phones have another great advantage: they are the entry point for customers who are likely to buy a low end smart phone down the road. Nokia is waiting for these customers with a very affordable, yet attractive product: the Lumia 520.

The icing on the cake comes from Nokia's infrastructure business, formerly known as Nokia Siemens (SI) Networks "NSN", which managed to deliver a strong operating profit margin of over 11%.

Nokia's recovery story is getting more solid by the day:

1. Costs have been slashed dramatically - restructuring costs are now mostly behind them.

2. NSN has been turned around and is yielding strong free cash flow. They have a lot of patents in the crucial, next generation LTE technology.

3. With today's profitability, NSN is worth 0.7X sales at the least. Nokia bought Siemens' share for half that valuation.

4. Whereas competitors Apple (NASDAQ:AAPL), Samsung (OTC:SSNLF) have been resting on their laurels lately (and disappointing their shareholders), Nokia is launching new products every two months or so. It is now acting like challengers. It is no longer in survival mode.

5. Windows - thanks to NOK - is credibly becoming the third operating system at the expense of BlackBerry (NASDAQ:BBRY). One doubts there is room for a fourth OS. This opens the door for Windows to the corporate segment once dominated by the Canadian company.

6. Nokia is launching products for every segment of the market, a strategy that is looking increasingly successful. The high end market is saturated and no longer growing. All the growth for Smartphones is in the lower to mid range products.

7. Average selling price is coming down as a result of the previous point. Far from being a problem, it is the result of a deliberate strategy.

8. The balance sheet is strong and the cash burn is over.

9. There are strong rumors of a coming tablet and/or phablet.

Nokia is a STRONG BUY. The share price does not reflect the change in status from survivor to credible challenger.

Disclosure: I am long NOK, AAPL. 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.