Lately I've noticed an interesting trend of articles and discussions regarding Nokia (NYSE:NOK) and these discussions usually focus on how Nokia needs a much better product in order to "kill Apple (NASDAQ:AAPL)." For example, one of the latest articles published at Seeking Alpha regarding Nokia is titled: "Nokia Lumia Is No Apple iPhone Killer." Until recently, I didn't even know Nokia was out there to kill Apple. Saying "Nokia's new phones should be able to kill Apple" is like saying "Ford's (NYSE:F) new cars should be able to kill GM" or "Exxon's (NYSE:XOM) new oil finding will kill BP." Nokia doesn't target "killing" any competition, nor does it need to. Many companies can co-exist in a given environment. A company doesn't need to put competition out of business to become successful or valuable. All Nokia needs to do is to become profitable and create positive cash flow in the near term to make its investors happy.
As Nokia has been going through its cash, many people see the company running out of cash and going bankrupt in a few years. Since 2008, the company lost 91% of its market value. The company's value loss is 62% in the last year. Many things just short of bankruptcy are already baked in the share price at this point, and any kind of turnaround would boost the company's value significantly. In the next year, even if the company earns only 35 cents per share, this will still give the company a P/E ratio of 10. If we include the company's cash holdings, the P/E ratio will look more like 7. Given this, even turning slightly profitable would be good enough to help Nokia's share price. It's way too early to talk about whether Nokia can "kill" the competition and this kind of discussion can only distract from the main point.
Now that Nokia is moving its production plants and many of its operations to Southeast Asia, its margins will improve significantly. With the help of Microsoft (NASDAQ:MSFT), Nokia will become profitable again sooner or later. Nokia has two strong allies, Microsoft and AT&T (NYSE:T). These allies will make sure Nokia's new phones generate as much revenue as possible. Once the revenue comes in, Nokia's cost cutting skills will determine the profit margins and final earnings. In 2011, Nokia was able to generate revenue of $50.19 billion, however the company wasn't profitable due to the high costs as the company has been going through a turnaround and working on developing new products. For example, in the last three years, Nokia spent $23 billion for R&D.
It looks like the heavy R&D spending will be paying off soon for the company. Nokia's latest phone, Lumia 900, received a lot of positive reviews on the internet, and AT&T is pushing this product heavily to its customers. There is no marketing like word of mouth, and as Lumia 900 gains a fan base, its sales will get better. These days social media is the most effective way for word of mouth to spread. For example, Nokia developed a promotion video of Lumia 900 for social media, and after being viewed by more than a million people on Youtube, the video received 10 times as many "likes" as "dislikes." Outside of U.S., Nokia still has a strong brand name, and it is still one of the few brands that come to mind when "mobile phone" is mentioned.
One of the things I like about Nokia is that the company was able to see all the things it was doing wrong, and it started a process of turnaround proactively. Many believe that the turnaround is too late, but better late than never. I am cautiously bullish on Nokia. I believe that the company's reorganization will be successful, and by successful I mean that the company will return to profitability within 1 year and see double-digit growth after that. Also, while I'm bullish with Nokia, I don't recommend anyone devote more than 10%-15% of their portfolio to Nokia. Putting all one's eggs in one basket is never wise.
Disclosure: I am long NOK. I don't plan on selling nor adding to my Nokia shares anytime soon.