By David Sterman
Circle your calendars for March 28. That's when investors will start to talk about the biggest growth opportunity for smartphones in the months and years ahead.
On that day, China Unicom (CHU), China Telecom (CHA) and China Mobile (CHL) plan to roll out a new phone to counter the growing strength that Apple (AAPL) and Google (GOOG) are showing in the market. These wireless carriers don't want to become beholden to these tech giants, and have expressed a desire to make sure the market for phones remains truly competitive.
Their Trojan Horse: Nokia (NOK) and its new line of Lumia smartphones.
Within a few days of that launch, we'll have a clearer read on whether these mobile phone titans (which collectively sport a $300 billion market value) can convince consumers to make a switch.
For many Chinese consumers, the choice of a Nokia phone may be a no-brainer. The company aims to deliver a range of phones that are less expensive than the iPhone, or pack in more features for the same price. At a recent investment conference, Nokia's CFO, Timo Ihamuotila, noted that an unsubsidized iPhone retails for roughly $775, roughly $200 more than for what Nokia's equivalent version of the Lumia phone retails ($580). The Lumia 710, for example, can be sold -- at a nice profit -- for less than $400. That's the price point likely to best be able to expand the Chinese market.
That market is growing so quickly, it is expected to be larger than the U.S. market by the end of this year. Here in the United States, Nokia appears to be off to a fairly solid start with T-Mobile, and a launch with AT&T (T) serves as the next domestic catalyst.
I ran through some of these issues when I first added Nokia to my $100,000 Real-Money Portfolio less than a month ago. The coming launch in China and the steady rollout in the U.S. don't change the facts on the ground: Nokia still has so much to prove. Indeed, there's a good chance that the company has only moderate success. Apple and Google are such great companies and will surely fight back hard against any market share losses. But I'm no longer seeing this as a Nokia vs. Apple and Google battle. Increasingly, I see Nokia targeting areas of the market that are simply below Apple and Google's radar, what the company calls the "next one billion" (consumers). The company is paring costs aggressively so that it can make a profit by going after the bottom of the market.
GE's (GE) widely-respected former Chairman and CEO Jack Welch once said that companies should only tackle markets in which they can dominate, citing a study that the No. 1 player has twice the profit margins of the second player, and the second player has twice the margins of the third player. In this instance, I think he's wrong. There's room for three at this table.
The fact that Microsoft (MSFT) is pulling a lot of weight in terms of brand-building for the new Windows mobile phone software that underpins Lumia is a real plus. Microsoft has tried and failed before to make a major dent in this market, but the current efforts appear to be winning a lot more buzz. What will that mean for consumer demand? We'll soon find out.
Risks to Consider: Nokia's management must prove not only that Lumia phones are winning converts, but also that the company is making money on the phones.
I'm getting closer to building on my modest 800 share position in Nokia. Counter-intuitively, I'd like to see shares move a bit higher before doing so, as that signals broadened support from the investment community.
A few weeks ago, I suggested to my $100,000 Portfolio readers who trade alongside me that a stop-loss be put in place at $4.50, but now think $5 is more suitable, as shares have moved up a bit. Indeed, if shares move up past the $6 mark, you should move your stop-loss up to $5.50 (as I'll be doing) since there are still risks in this business model.
There's an ample amount of media coverage to peruse about the imminent China and U.S. launches. If you own this stock, then it's imperative you stay informed for signs of any sales strength or weakness as the rollouts unfold.
StreetAuthority LLC owns shares of NOK, MSFT, GOOG, ABT in one or more if its “real money” portfolios.