You might remember my previous article on Microsoft's (NASDAQ:MSFT) Windows Phone and Nokia (NYSE:NOK), and if you don't I recommend reading it here. A lot has happened since I wrote that article, so I think it is a good time for an update. At the time of writing my article, Nokia's stock price was at $5.21. In 2012 it saw a huge rally, but since the MWC (Mobile World Congress), it has regressed strongly, and is only up to $5.29 as a result. This regression presents a very enticing buying opportunity, as the reasons for the recent dip are simply wrong.
Why Investors Bailed After MWC
First of all it is important to understand why Nokia was hit so hard after the MWC. For that purpose, let's put ourselves in those investors' shoes.
A couple days before MWC, Nokia CEO Stephen Elop announced that "significant industry news" would be announced at the event. Although I, unlike many, like Elop's strategy and what he has done at Nokia, I think that this announcement was foolish because it created high expectations that ruined Nokia's announcements (at least to investors). As a speculator (one of the ones that bailed), this is what I would have expected:
- Nokia will announce some kind of merger with Microsoft, or a buyout of its smartphone unit. This would make current shareholders significant money, judging on Microsoft's history of paying high prices for acquisitions (Skype, anyone?).
- Nokia will announce a new Lumia Phone with significant new features, including a new version of Windows Phone.
- Nokia will release some great numbers on the sales of its new Lumia line.
What happened was that at the conference, all three of these speculative predictions were pretty much destroyed.
- In a post-event interview, Stephen Elop responded to a question that Nokia had no plans to merge with Microsoft or to sell its smartphone unit off. Many investors held Nokia speculating on a buyout move, so Elop's words had a strong effect on the stock.
- A significant new Lumia Phone was not announced. Instead, the 610 was announced (which many say is still too expensive, another disappointment) and the 900 was confirmed for Europe. The significant device runs Symbian, which heavily disappointed investors, but we will get to that later.
- No numbers were released.
So it is not surprising that the stock took such a hit, and if I were a short-term investor I would have sold.
But I make long-term investments that I do not touch due to fluctuations, so here is why I held on to the stock, and why I am reassured that my investment thesis is still intact.
Why Nokia Is Doing Great
Below are the reasons why I like Nokia even more than before as a long-term turnaround stock pick.
- Nokia is not RIM (RIMM). Whenever I see comparisons between the two companies, I cannot help but laugh. Just because both of the companies are in trouble does not mean that they are similar, or, more importantly, that they share the same fate. A better way to compare the two companies is not by what their current situations are, but by what they are doing to get out of it. What aggressive steps has RIM taken to stage a turnaround? To me, the simple and sad answer is: none. On the other hand, Nokia has been just about as aggressive as it could possibly be, without making any fatal errors. It has decided to dump its old OS for Windows Phone. It has released 4 new Windows Phones, of which all have received great reviews, in a matter of a few months. It just announced a phone with a 41 megapixel camera that combines several pixels into one to create insane 6-8 megapixel images (can anyone call that passive?). Comparing Nokia with RIM is like comparing a sinking ship to a ship in a storm. One is doomed, while the other is working tirelessly to come out on top when the storm ends.
- Nokia is trying to cover all price-points with its Lumia range, and is doing so systematically. It started with the 800 and 710, and then expanded one step up with the 900, and one step down with the 610. People were expecting two to three steps down with an extremely cheap Windows Phone. Be patient, it's coming. Microsoft just brought system requirements for future Windows Phones down, and Nokia will continue to expand its range and will soon hit a lower price point. The next step up will most likely be a ClearView Windows Phone.
- Who cares if no one is acquiring Nokia? This does not change my thesis, and does not affect the company's operations. Nokia is HUGE, and acquiring it is very, very tough. It has a lot of operations all over the world. Let's just forget this prospect and not speculate on something that has so little of a chance of happening. All I see from it is a sign of confidence: Nokia really believes that it will prosper in the future (further evidenced by its preserved dividend).
- The Nokia 808 PureView is not a good device, and it will not help Nokia with its turnaround. However, those that expected the ClearView technology to hit Windows Phone now did not do their DD. Nokia has been working on this breakthrough for over five years, and guess what, five years ago Nokia was doing great and could not imagine abandoning its in-house software, so it did not plan on adapting it for Windows Phone. It will take time for Nokia to adapt or even re-write the ClearView software for Windows Phone, and for Microsoft to adapt their own software for ClearView. I think that Nokia made the right decision: it needs to get the technology out to market, have it tested, and have a chance at getting it perfect once it releases it on a Windows Phone. Nokia is being aggressive, but it is not superman. Give it at least a reasonable amount of time, and it will deliver.
ClearWire IS significant industry news. It's a differentiator, exactly what Nokia needs. Right now, all the pieces have been set up, and once they all converge, Nokia will dominate again. Think about it.
- Windows 8 is coming out soon.
- Nokia has set itself up to have the best smartphone cameras for a while.
- Microsoft owns Skype, and will most likely integrate it with Windows Phone in an intelligent way.
- Nokia has developed some very solid smartphone apps, and is continuing the trend.
- Nokia is very close to finally making a major release in the US with the Lumia 900.
- Windows Phone will soon be compatible for multi-core processors.
What we have is the potential for a new high-end phone with by far the best camera on the market, smart Skype integration (everything on Windows Phone is strongly integrated), Windows 8, a powerful processor, a large screen, and splendid design. When this superphone comes out, I want to be holding Nokia. It will be one of the only phones on market to arguably be the best in all categories. Although the current Lumias have seen decent success in Europe, this will be the device that will truly mark the beginning of Nokia's comeback.
Nokia is still a great investment, but it does not appeal to short-medium term investors right now because it is still setting up the pieces to its recovery. However, to long-term investors, it is extremely appealing. Nokia stepped up to the plate with its new camera technology, and continues to be extremely aggressive. It is on the verge of having all the elements ready for a truly game-changing device, and investors are not seeing it. This is a significant factor that is not priced-in, and you should get in before the market begins to believe in the Nokia turnaround story.
Disclosure: I am long NOK.