Nokia's Rebuild Continues

Jun. 7.12 | About: Nokia Corporation (NOK)

It's been a rough few years for Nokia (NYSE:NOK) which has been gone over to death by many a market analyst, including myself. With the annual trade shows like Computex and E3 revealing all the new and cool stuff the headlines are jammed with a press releases. Slipping under the radar was an announcement by Nokia-Siemens (SI) joint venture that they landed a major 4G contract in Saudi Arabia.

Saudi Arabia is one of the most heavily penetrated smartphone markets in the world at 60% according to Google's new Our Mobile Planet analytics service. Moreover, most of those smartphone users still use a Blackberry. It is a high-end market that is dominated by Research in Motion and Apple (NASDAQ:AAPL). Android has just 11% and Windows Phone just 4%.

Breaking Windows Phone's market share down by age we see a very clear trend. Windows has more pull with older users than with younger ones. This is also the demographic which has the lowest smartphone penetration which accounts at this point for why Windows Phone's numbers are so small. Whether this effect is a combination of lack of cheap hardware, coolness factor or a combination thereof it is the reality that both Microsoft (NASDAQ:MSFT) and Nokia will have to overcome.

Of the 40 countries that Google's data covers, nearly 60% of 18-29 year old mobile phone users have a smartphone, this drops to 45% for 30-49 year olds while just 18% of those 50 years old and older have a smartphone.

While Nokia's future is tied to Windows Phone in the smartphone arena that does not mean they have given completely up on the entry level feature phone market. They announced at Computex three additions to their entry level Asha line of phones which continue to blur the line between an entry level smartphone and a feature phone. Costing less than $100 these phones are all touchscreen enabled running Nokia's S-40 OS with a touchscreen UI overlaid capable of 3G connection speeds. They are the second group of phones launched under the Asha sub-brand and are targeted at the next billion people to buy a mobile phone.

These phones are commodity offerings that will neither make nor break Nokia's future. But they are necessary to maintain their brand image in emerging market countries such as China and India where their reputation as a superior phone is very much alive. Many people in this part of the world have both a smartphone and a dual-SIM Nokia feature phone that they use for making important calls. They are reliable yet disposable and that is something no other phone manufacturer has. The goal is, obviously, for those who can afford a smartphone will choose Nokia and Windows when that time arrives.

Looking at the stock price, both announcements along with Microsoft's at both Computex and E3 have Nokia's stock price firming between $2.60 and $3.00 per share. The latest report from IDC has Windows Phone projecting a 16% market share in the smartphone industry by 2016, second only to Android which they project will still maintain more than half of the smartphone market. iOS, according to IDC, would be 3rd at 15%.

IDC's market predictions should be taken with a grain or two of salt, but the take away is that nothing is settled in this market as the premium end of the market has yet to embrace the smartphone at all. With the implosion of Blackberry OS on the horizon and the enormous Symbian penetration in China there is still a huge opportunity for Nokia to convert those users to Windows Phone.

It is hard to not justify a small position in Nokia at these prices, if only as an M&A target. The next earnings report will tell the tale in terms of cash flow. If they are operationally positive that will blunt the cash burn argument that many feel is an acute problem. Microsoft needs Nokia for Windows Phone so the idea that they will not be willing to pump money into the company is fanciful, unless one believes that Windows 8 will tank Microsoft as well. The stock will likely rise simply on good news, which it has not had in a long time. A position now is like buying stock at option prices.

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