Nokia-Microsoft Partnership Could Produce The 'Next Big Thing'

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 |  Includes: MSFT, NOK
by: Brian Nichols

Nokia Corporation (NYSE:NOK) is a communication company that operates in 3 segments: Devices & Services, Nokia Siemens Networks, and NAVTEQ. Nokia Siemens Networks and Devices & Services both operate and improve the company's mobile phone/communications industry. NAVTEQ is a provider of digital map information, along with navigation systems.

Positives

Nokia has the largest patent portfolio in the communications equipment industry. The company has more than 20 years of global success and is among the best global company in mobile phone sales. It has a large amount of cash and low amount of debt to correspond with more than $42 billion in annual sales.

Nokia has placed a high level of importance on its mapping services. The company has expanded the services during the last year to become more competitive, which include navigational services with Volkswagon and indoor mapping services for businesses, to better educate the business owner on the consumer among other benefits.

The mapping segment has occupied a large portion of the company's attention, however Nokia has continued to stay true to its number one source of income: its mobile devices and services. In April 2011 the company announced a new structure with two units, the mobile phone and smart devices, with each being responsible for profit, consumer growth, marketing and development with the goal to separate the two and focus on both areas of business as individuals.

While attempting to develop these 2 units, the company partnered with perhaps the only technology company in history with a similar level of long term success: Microsoft (NASDAQ:MSFT). Together the two companies are working diligently to create a new smart phone that will incorporate what makes both companies so great. Between the two companies an amazing product could be developed that utilizes the Windows operating system, Skype, its Office programs, advanced business software, cutting edge mapping services, an application platform that incorporates both Nokia and Microsoft's many partners, and the thousands of additional patents that could create unique advantages that no other smart-phone could offer. I truly believe the new Windows phone has the potential to offer something we have never seen before on a mobile device because of the innovation and genius of these two technology companies.

Negatives

Since 2007 and the arrival of the smart phone era, Nokia has consistently lost revenue. The company has been forced to lower its selling, staffing, research and development costs to provide a net income that is required to operate efficiently. Despite these cuts and over $9 billion in revenue, last quarter the company announced a net loss of $368 million.

With the company's current business model it requires a large portion of the entire industry of communication devices to produce a profit. A large reason being its global presence and the cost associated with being relevant in nearly all areas of the world. I believe the company must address this problem, because it's simply not the same company as it was in 1999, and with more competition it will be very difficult to ever reach similar levels of success.

The company is working with Microsoft and has a realistic chance of producing an exceptionally competitive product. However, if the product was to fail or produce similar levels of return as previous Windows phones, I would expect for Nokia to suffer as it could take a substantial amount of time for the company to post consistent profits.

Analysis

Nokia stock has been beaten down over the last few years, with a loss of more than 50% since January 2010. The loss of value has been a result of the smart phone era, with Nokia losing more than 70% of its value since January 2007, when Apple (NASDAQ:AAPL) released its iPhone. The company is yet to capitalize on the growing demand for smart phones, and with its global growth Nokia must act fast to remain relevant in the areas of the world where it's most popular.

These facts contribute too many of the positive developments that this company has in place. We all know about the partnership with Nokia and Microsoft and the goal of developing a new Windows phone that is competitive against the iPhone and Android system. The company is at its lowest point in over 20 years, which brings me to another point: The company has 20 years of consistent innovation and success. Therefore, I believe the new Windows phone presents the opportunity to be successful. Both Microsoft and Nokia have failed to benefit from one of the fastest growing global markets. Yet both companies have realized and identified the issues and are working to correct the issues by partnering together and attempting to try and make up for lost time.

The trends in this industry change quite often, and although I believe that Apple has the industry locked in for the next 5 years, I have also believed the same for Samsung (OTC:SSNLF), Motorola (NYSE:MMI), Research In Motion (RIMM), LG (OTC:LGCIF), and Nokia. At some point in time each of these companies controlled the mobile device industry. Apple has a head start, and Google's (NASDAQ:GOOG) not far behind, but with changes occurring so frequently, I see no reason that Microsoft and Nokia could not be successful. I believe the risk is worth the reward, and I will bet on consistency -- and there has not been a more consistent pair of companies than Nokia and Microsoft.

At $6.25 a share Nokia appears to be trading at the bottom of its range, and with a yield of 9.13 the stock begins to look more attractive. I do not believe that Nokia is for the short-term trader, but it could present opportunity for the long-term investor. A $10,000 investment in Apple on January 3 2003 would now be worth over $525,000; I'm not saying that Nokia will return profits of this magnitude, but what I am saying is that you never know where the next transcendent device in technology will come from. History tells us that it changes quiet frequently. So therefore I ask myself, why can't it be Nokia and Microsoft -- two of the most successful companies in the history of technology -- because historically, all indications point toward success.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in NOK or MSFT over the next 72 hours.

Disclaimer: As with any investment, due diligence is required. The opinions in this article are not intended to be used to make a particular investment or follow a particular strategy.