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With the Lumia 800 and Lumia 710 recently released in some markets, and one or both of these smartphones likely to be announced for the U.S. this week, Nokia (NYSE:NOK) is quickly approaching its day of reckoning. Okay, so maybe more like year (or even 2-3 years) of reckoning. Looking at Nokia’s balance sheet, and taking into account the billions of dollars in support from Microsoft (NASDAQ:MSFT), the company will be able to sustain operations for a long while even if its new Windows Phone smartphones are not an immediate success. There is, however, significant opportunity for both short term and long term gains.

Here are the main reasons why I am so bullish on Nokia at its current share price.

Value

With Nokia’s shares trading under $5.00 right now, and a book value in the range of 4.50 to 5.50, the shares are approaching their floor. With the additional recent drop of about 20% due to extremely conservative analyst sales estimates for the newly released Windows Phone smartphones, shares are trading at an additional discount right now. My research has found a very positive initial reception for these new phones, particularly in Europe where Nokia has strong customer loyalty. The recent estimate for less than 1 million, and as low as 500,000, devices shipped this quarter is an absolute worst case scenario. These low numbers have already been priced into the stock.

Tech

Nokia makes some of the best mobile phone hardware in the world. Microsoft’s recently released Windows Phone 7.5 OS (codenamed Mango) is on par with Google's (NASDAQ:GOOG) Android and Apple's (NASDAQ:AAPL) iOS 5 operating systems, and far surpasses RIM’s (RIMM) BlackBerry 7 OS in terms of functionality. I have used all three operating systems and in my experience Mango is the smoothest running to date. Mango, however, is just a stepping stone. With the release of Windows 8 next year, and Windows Phone 8 (Apollo), Microsoft will have created an integrated ecosystem of products unparalleled by any of its competitors. This will add support for NFC and LTE, two of the key technologies currently being adopted in the industry, by mid-2012 (at the latest). Nokia has proven its ability to get innovative products to market quickly with the release of its first Windows Phone powered devices less than 10 months after the deal with Microsoft was announced February 11th 2011.

Strategy

With the integration between PCs, Windows 8 tablets, smartphones, and its Xbox 360 system, Microsoft will be offering a truly unique ecosystem. With Microsoft’s support Nokia is the best positioned hardware manufacturer to take advantage of this. Nokia Siemens Networks also appears well positioned for the mass adoption of LTE technology.

Competition

If the Windows Phone operating system succeeds, Nokia will recover, at least in the short to medium term. Eventually, the company would face significant competition from the likes of Samsung, HTC, and others who would place much more emphasis on Microsoft’s mobile OS. Competition from these companies, however, is not overly important at this point as they will continue to focus on Android devices. Therefore, the most important competitors are Apple, Google, and RIM. Apple iPhone users are extremely loyal customers so it will be difficult steal away market share.

Google’s Android is a far different story. The fragmentation across manufacturers and devices coupled with poor customer support and a lack of timely updates (when they come at all) has left many customers unsatisfied. Google is trying to address these issues with Android 4.0 but it appears unlikely that things will improve significantly in the near future. RIM’s (likely) impending collapse offers significant opportunity for Windows Phone devices, particularly among business users. Unlike Nokia, RIM has been failing to execute the transition to its new OS and will likely continue to face significant delays. Companies that deploy Windows Phone devices will enjoy numerous advantages with the integration of Exchange and Mobile Office being major differentiators. Windows Phone devices will lead all competitors as business friendly devices that offer all of the popular consumer features of iPhone and Android.

Dividend

The earnings estimates for the next couple years are below the current dividend. This does put the dividend in danger of being reduced or cut altogether. With the massive potential for recovery in the stock price, I see the dividend as a bonus. With a current dividend yield of about 10.9% this is a pretty sizable bonus.

Worries

Here are a few of the main issues that would negatively affect my outlook. At this point I do not see any of them posing a major threat but will watch closely for developments.

  • Lack of commitment to the Windows Mobile OS from Microsoft if adoption is slow (Microsoft seems totally committed as they were with the Xbox system on which they sustained losses for many years)
  • Increased focus on Windows Phone devices from competing hardware manufacturers
  • Economic turmoil (particularly in Europe)
  • Resurgence of BlackBerry devices with business users once RIM’s transition to their new BlackBerry 10 OS is complete
  • Complete dominance by Apple and Google’s mobile operating systems
  • Failure by Nokia to create the best hardware running Windows Phone
  • Failure by Microsoft to execute with Windows 8
  • Lack of support for Asian Languages with Windows Phone
  • Negative consumer sentiment from Windows PC customers

Final Thoughts

The rapid expansion of the smartphone market will continue for years to come. Microsoft’s product ecosystem combined with Nokia’s mobile phone hardware expertise will position the company well for recovery. As the leading Windows Phone hardware manufacturer, Nokia will be the main beneficiary of adoption of the OS.

Disclosure: I am long NOK.

Source: Nokia Poised For Both Short- And Long-Term Gains