Nokia: A Niche Play At Best

| About: Nokia Corporation (NOK)

Is there anyone out there that wishes a phone could just be a phone again? The now floundering Finnish mobile device maker, Nokia (NOK), certainly does. The explosion of the smartphone has simply decimated Nokia, who has long been a stalwart in the market for sturdy, reliable and simple mobile devices. I remember my first cell phone was a Nokia. It was a great phone. You could drop it and it didn't seem to care. It made phone calls and texted, what more could I ask of it? It was a phone, right?

Oh, how fast things change. Fast forward to the present day and phones can no longer be just phones. New mobile phones must do video, have app stores, take pictures, and perhaps, if you really need it to, make phone calls. The leaders of the 1G and 2G cell phones are now irrelevant. Creative destruction has run its course and the simple cell phone has been destroyed. So, what happened to the stocks of these former leaders?

As Apple (AAPL) skyrockets to $1000 on the shoulders of the iPhone and the iPad, Nokia has seen its share price fall nearly 90% since 2008. The question is, did it fall too far? Is there any value still there? And should investors pay attention?

At first glance, Nokia looks to be a victim of innovation. The same way Kodak (EKDKQ.PK) was when the digital camera took hold. However, Nokia may not be as dead as Kodak. Despite its falling market share, Nokia still reinvests 15% of revenues back into R&D. Sure, the iPhone and new Android phones have without a doubt dwarfed Nokia, but the question is whether there is room for a company like Nokia to still make money. With the Kodak example, Kodak remained firm on selling film, despite the fact that digital cameras were cheaper and easier to use. One could argue the reverse is true with mobile phones. The advancement of smartphones has made phones more complex and more expensive. Despite using these new smartphones, consumers are sentimental about the days of the simple mobile phone. This sentiment alone is the only chance Nokia has for a niche to do business in.

It may seem to be an insurmountable objective. The company is up against the mobile monsters in Apple and Google (GOOG). Both have outstanding app platforms and stunning phones. Nokia has slipped in the backdoor and partnered with Microsoft (NASDAQ:MSFT). Time will tell if this was a good choice, but there are reasons it may be the right one. Despite Apple's stunning profitability and growth, 92.5% of desktops still run on Windows.

For mobile devices, this is not true. Apple's iOS has a 60% market share ahead of Google Android's 19%. However, Windows' desktop share is nothing to sniff at. Users may find the interoperability between their desktop, mobile device and Xbox an advantage. Now that the Windows platform has a phone that can at least kind of compete with the iPhone and Android phones, in the new Nokia Lumia 900, things may begin to change.

This new phone from Nokia has several selling points that make it attractive. The phone sells for half the price of the other competing smartphones at $99.99. It lacks some of the processor speed and camera specs of the others, but that may be what it needs to succeed. Again, in appealing to that sentiment for a simple, reliable phone, the new Lumia 900 may fit the bill, while at the same time not being too much of a dinosaur. I would argue much of the need for a faster phone with a better camera is not at all about functionality, but rather a sort of "phone envy". The Lumia 900 has the look of an expensive phone with a low price tag, and hopefully Nokia's trademark simplicity and reliability. I believe the additional aspect of the Microsoft interoperability makes the Lumia 900 the product Nokia needs. And Nokia needs a product bad. Let's look at the numbers.

Currently, Nokia is trading for 13.4 forward earnings, which is a little high, given the company's recent history, and compared with the more stable competitors. For example, Apple trades for 12.4 times forward earnings, and we don't have to worry about Apple being profitable this year. Google also trades for less at 12.7 times forward earnings. If an investor is looking for a long shot, Research In Motion (RIMM) is available for 7.3 times forward earnings. Moreover, the issue with Research In Motion isn't profitability, but rather margins and growth.

So, as beat up as Nokia is, it still may be overvalued. The company lost money last year, mainly because the company maintained its research and development levels, despite declining margins and revenue. Investors should actually be happy about that, because research and development is just about the only way to save this firm. As far as cash flow, it looks like Nokia will be able to keep the lights on for a few more years without problems. Unless the new Lumia 900 is a smash hit, investors need to stay away.

Unfortunately, the early reviews for the Lumia 900 are not good. Without the Lumia 900 becoming the savior it is billed to be, there is really no hope for Nokia as an investment. Particularly not now as Nokia shares are currently trading at a valuation over Apple and Google. It's too bad, because I happen to miss the days of the simple phone. I currently enjoy my Blackberry, despite its floundering creator Research In Motion. From a business perspective, my tough, long-lasting reliable Blackberry is simply no match for a fragile, finicky iPhone. What is Research In Motion thinking selling me a phone without glass on it! From an investment standpoint, Nokia and Research In Motion are simply not in the same ballpark as Apple and Google. Keep an eye on Nokia, but keep an eye on the valuation. The company is a niche play at best.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.