After reading a few recently negative articles on Nokia (NOK), we decided to share some of our research. Among key product groups Nokia provides unrivaled simplicity and value in the sub $150 smartphone space. What is unknown to many, is the internationalization benefits of Nokia Lumia phones that makes products like the Lumia 520 much more desirable than rival Androids. We predict storming market share gains for low end Lumias before the end of this year.
The Lumia 520 being the low end of Windows Phone 8 devices, provides fully downloadable Navteq (Nokia Here) maps that require no Internet connection. This along with glove sensitive touch screen and full support for all languages integrated in all handsets sold worldwide (unlike Android where special builds are needed for certain regions, e.g. Dubai), is appealing to a wide range of audiences. Undoubtedly, the Lumia 520 is a low margin product but a great strategic step that will reap rewards in the longer term for the Windows Phone eco-system and Nokia. Nokia is a good buy for investors looking at a 12 month or longer time horizon after the feature phone share loss stabilizes.
"... Nokia CEO Stephen Elop said he was encouraged that the Lumia 520 had started to sell strongly in China, France, India, Thailand, the UK, the US and Vietnam." (source)
As with most stocks, we prefer to look at how the underlying product is selling and get a feel about sales direct from retail customers. For this purpose we stopped by a series of Carphone Warehouse shops in London to see how Nokia's new low price Lumias are doing. We saw feature phone customers upgrading to the mighty Nokia Lumia 520 phone, first hand.
Feature phone customers looking to upgrade to smartphones typically first inquired about an iPhone, looked at the iPhone price with horror, and then asked salesmen for alternatives. They were usually pointed to the Nokia 520 and cheap Androids. Most costumers with no knowledge of smartphones chose Windows Phones. For instance, Sally Silver mother of three told us "I think for me this Nokia Lumia 520 is more than enough. I just need easy email access and a modern phone and I don't see why I should pay four times more to get an iPhone." Although this product may have reduced demand for the Lumia 820 and Lumia 920 phones, it has attracted more developers and broadened the Windows Phone ecosystem. The downside for Nokia is the recent price reductions on the Lumia 920 to maintain competitiveness. However, it is clear Nokia is in this game for the longer term.
Bullish Catalysts for Nokia
- Slowing growth in high-end handsets & strength in low/mid end a trend that should help Nokia as consumers somewhat warm to Windows 8.
- Indications that Nokia has increased Lumia component orders in supply chain from 30 to 45m. Though actual numbers may be meaningless, it indicates Nokia's confidence potentially with sell-through.
- If Windows phones get 5% share by 4Q13/1Q14, we believe Nokia will make a profit otherwise it could dispose/shut-down the handset business.
- More bank analysts turning positive in the last couple of months (Nasdaq)
From the list of shortcomings we mentioned back in January many have been addressed (original article). In particular, the lack of critical apps has been addressed. The BBC iPlayer and many other popular apps like Viber, Fruit Ninja, Asphalt 7 and other apps are now available. Nokia is listening to customer feedback as can be seen by product releases such as the lighter Nokia Lumia 925.
The Share Price Picture
The Nokia share price is on a clear upward channel towards the January peaks, with RSI in the normal zone; neither overbought nor oversold at this time. With such formation, it seems the bears have it wrong.
Clearly Nokia is not all about smartphones. The feature phone business in particular could be in trouble. We do believe that in the 5-year view there is likely a market for say 100m feature phone devices each year. So Nokia's quarterly volumes would need to decline from today's 55.8m to 25m per quarter. If things go well the profit loss will be offset by Lumia gains. Finally, we do not see much downside to the NSN business as it has stabilized, only losing some orders due to the Iran sanctions.
Nokia is in the second cycle of Microsoft's (MSFT) Windows phone. Most importantly, Nokia has low and mid range smartphones just as the growth in the market is mainly in that segment. In addition, Nokia with Microsoft is addressing many of the weaknesses. Indications are that the Lumia 520 has received operator traction and better consumer traction than previous models, verified by our independent UK retail checks. At the same time press reports (WSJ, Bloomberg on 20 Jun 2013) indicate that Nokia at the same time has looked at selling the handset business. Based on these reports and our independent visits to the high street Nokia's strengths in high quality low-end smartphones will prove invaluable. Thus we conclude that Nokia's bullish technical share run should continue until at least $4.50 if not more, if stock market conditions remain bullish over the next 3-6 months.