I am old enough to remember staring at people that used the old style mobile brick phones. Those phones were large and clunky and looked out of place. At that time, I never imagined that mobile phones would develop into sleek, efficient communication devices. Now when I travel, I am struck by the large number of people that seem to be completely immersed in their smartphones.
Wireless phones have become must-have items for billions of people. It is now estimated that there are more than 5 billion wireless subscribers worldwide. The largest seller of wireless phones is Nokia (NOK). Nokia's overall cell phone market share is around 37%. Nokia's stock is currently trading around $5.50. The stock has traded in a 52 week range between $4.46 and $9.42. Nokia's dividend is $0.18 with a dividend yield of 3.4%. The stock has a forward price to earnings ratio of 14.26, and a price to book ratio of 1.3. Over the past 52 weeks, shares of Nokia's stock have decreased by 36%. However, the stock price has increased 9.7% over the last two weeks.
In recent years, Nokia's earnings have decreased, and its stock price is down. The primary reason for Nokia's downturn has been its inability to compete in the lucrative smartphone market. In an effort to turn things around, Nokia's newly hired CEO Stephen Elop, (who last worked for Microsoft) announced that Nokia will partner with Microsoft (MSFT) to produce highly competitive smartphones, which will use Microsoft's Window's 7 phone operating system. It is hoped that "Microsoft and Nokia can achieve more than either could individually."
In Stephen Elop's first major turnaround project, Nokia used its partnership with Microsoft to produce several lines of smartphones called Lumia. The phones are designed to attract customers from the low end segment of the smartphone market through the top of the line segment of the smartphone market. The smartphone launches will be in Europe, Asia and North America. For example:
On 14 December 2011, T-Mobile and Nokia officially announced their plan to sell the mid priced Lumia 710 from 11 January 2012, for $349.99 prepaid or $49.99 with a 2 year contract with minimum of $60 per month plan and $35 per line activation fee.
The Lumia 710 has already been released in some Western European and Asian countries. On April 8th, the company will release its Lumia 900 smartphone in the North American market. The phone will be sold through AT&T and will cost $99.99. The company also announced that it will launch of its high end Lumia 800 smartphone in the United States in April.
The most profitable part of the cellphone business is in smartphones, and there are four significant smartphone providers: Google (GOOG) Apple (AAPL), Research in Motion (RIMM) and Nokia. Google and Apple are the dominant smartphone providers. Smartphone's with Google's Android powered operating system control 50% of the smartphone market share. Apple is in second place in terms of market share with 29%. Nokia Smartphones, which previously used the Symbian operating system, have a smartphone market share of around 3%.
It is clear that Nokia's turnaround strategy has been engineered to take smartphone market share from its bigger competitors, Apple and Google. Unfortunately for Nokia, catching up with Apple and Google could be a major task. Apple has a market cap of $586 billion and Google has a market cap of $210 billion. Nokia's market cap of $20 billion is small in comparison.
In the last quarter, Apple's earnings per share increased by 116% and Google's earnings per share increased by 9%, while Nokia's earnings per share decreased by 72%.
When you review the above numbers it probably seems that buying stock in Nokia would be a losing proposition. However, I recommend buying stock in Nokia for the following reasons:
Nokia's new Lumia smartphones will be a powerful catalyst on which the company should be able to build.
On March 15th, Nokia let news slip out that it was working on a tablet computer with a Microsoft operating system. When the news got out, the stock price rallied by 5.6%.
The company is still the largest provider of mobile phone devices in the world. It can use its infrastructure and supply chain to make its new Lumia smartphones available worldwide.
Nokia and Microsoft both have huge name recognition, along with reputations for providing high quality products. This should help to attract customers to their products.
Nokia "recently partnered with Service2Media, a company which among other things allows developers to easily create applications for different operating systems."
Nokia has a large presence in China. It will enter the Chinese smartphone market in April with its Lumia 88oC model. The launch will be through China Telecom (CHA), which has 126 million customers. This is big because it is estimated that China has 900 million cellphone accounts. The company also plans to begin selling its low end 610c model along with the higher priced 710c and 900c models to Chinese customers later this year.
In the United States, Nokia smartphones have received favorable reviews.
Also in the United States, Nokia has begun advertising its Lumia smartphones, which will be sold through telecommunication providers AT&T (T) and T-Mobile (DTEGY.PK). The initial launch of its smartphones will be huge because AT&T has 103 million subscribers and T-Mobile has 34 million subscribers.
Nokia's stock has been beaten down and is relatively cheap. The stock price is down by 154% over the last two years and 50% over the last 52 weeks. The stock's price to book ratio is only 1.08, which leads me to believe that the stock is near its bottom.
Nokia has $15 billion in cash on hand.
Nokia has lowered its dividend but the yield is still a very competitive 3.3%.
Nokia has fallen behind its competitors, but is now in the midst of reinventing itself. The company is aggressively moving forward in the smartphone market and with Microsoft as a partner it will soon be competing in the tablet computer market. Nokia has the cash and the consumer confidence that it will need to complete its turnaround. Therefore, I believe that the stock price will double within the next 18 to 24 months.