Nokia (NOK) investors are disappointed again. Shares declined by 13% after it failed to impress investors ollowing announcement of its new Lumia 920 smartphone. The new Lumia will run under Microsoft's (MSFT) Windows 8 platform. This could be the last major shot to reclaim its market share lost to Apple's (AAPL) iPhone, Samsung Electronics and Google's (GOOG) Android. Based on the latest second quarter 2012 Gartner data, Microsoft Windows phones have a market share of 2.7%, higher than the 1.6% market share of the previous year. Android devices and Apple's iOS still command the biggest chunk of mobile devices with market share of 64.1% and 18.1%, respectively.
The device sports bright colors and carries a bigger screen. It also has a technology that reduces blur and shakiness in pictures and videos. Despite the big improvement in the phone's interface and design, it failed to impress savvy investors. According to some analysts, it lacked positive surprises and a "wow" factor. It also did not set specific launch dates on the products. There are rumors that it will begin offering Lumia 920 in November; this would be in time to catch as many sales as possible during the holiday season. It seems that the Windows Phone 8 devices that the company launched look similar to the previous Nokia devices.
This is one of the reasons why analysts have been unimpressed and concluded that it would have a tough time against the very popular Samsung Galaxy S3, as well as the recently launched iPhone 5. The Samsung Galaxy S3 is expected to become one of the fastest and best-selling phones of all time. It is forecasted to surpass 30 million in global sales by the end of this year. Meanwhile, the iPhone is expected to sell roughly 8 million in the fourth quarter of this year. There are estimates that Apple is expected to ship 66% of the total smartphones sold for the major telecom carriers, AT&T (T), Verizon (VZ) and Sprint (S). This is up 45% compared to the prior year. All in all, it would be tough for Nokia to grab market share in the near-term. Its best chance is to slowly capture Apple and Android users. But, I believe that it would take significant efforts to convince loyal customers of its competitors.
The Key is Product Differentiation
While some of the previous Lumia features remain the same, I believe that Nokia is doing its best to differentiate its smartphone product lines from its competitors. For example, it has introduced Pureview technology and City Lens apps, which managed to differentiate itself from the Android and iOS platforms. It is too early to tell but I see this as a move that will help Nokia stand out from the overcrowded smartphone market.
I believe that Nokia should be able to tell consumers its story. It is not enough to build superior hardware. Its management should be able to convince the consumers to buy the product. That's how consumer technology companies like Microsoft and Apple did it. I also believe that Nokia is building an ecosystem with its foray into individual applications. This signals to the market that it is confident that it can deliver its goals and plans in the coming years.
The current figures of Lumia sales are encouraging. It reported second quarter 2012 Lumia sales of 4 million, which is more than the 2 million units sold during the same period last year. This means that the company is making progress with its plan to revitalize its revenues and overall profitability. Management believes that sales growth momentum will be maintained in the next two quarters due to upgrades and new capabilities. It is also betting that the Windows 8 platform will attract consumers to its phones.
Another key strategy is to reduce its dependence on the US market. It announced that it is planning to launch Lumia 920 with Telecom Italia, the largest telecommunication company in Italy. It also plans to tap into other European regions at a later date. It has already teamed up with Verizon and other US telecommunication carriers but Apple is expected to corner the smartphone market in the US. Despite these efforts, investors are still not convinced whether these moves will gain traction over the next 6-12 months.
Still Net Cash
Nokia reported a net loss of around 1.41 billion Euros in the second quarter. This is wider than the market expectations of loss of 641 million Euros. It has reported a revenue decline for the fifth consecutive quarter. For the last 10 years, revenues have increased by 2% a year. Its operating margins have also fallen from 15% in 2002 to negative 2.8% in 2011. Its operating cash flows have been erratic, fuelling fears of faster than expected cash burnout for the company.
In contrast, Google has grown its revenues by 83% for the last 10 years. Its operating margins have declined from 42% in 2002 to 31% in 2011. The decline is due to a foray into new products that have lower operating margins but strong growth potential. Its partner Microsoft has 10-year average revenue growth by 10% a year. Operating margins have also declined from 41% in 2002 to 29% in 2011. Microsoft has also seen its revenue decline from lower licensing fees and other core businesses.
A close competitor Research In Motion (RIMM) has had the same problems. RIMM posted revenue growth of 51% for the last 10 years, but it has experienced revenue declines of 7% in the past year. The issue for Research in Motion is that corporate firms are already switching to the iPhone. It lacks superior apps that are similar to the incumbent leaders such as Android and Apple.
As of the second quarter, Nokia reported net cash of 4.2 billion Euros. This is higher than analysts' estimates of around 3.7 billion Euros. Its average cash burn appears better than expected, which resulted in preservation of cash. Investors are still concerned whether cash burn would be out of management's control. Given that the recent Lumia performance, Nokia was able to survive. But, I believe that the company is still not out of the woods yet.
Nokia is forecasted to post lose per share of $0.40 this year, a decline of 205% compared to the same period last year. Analysts are still bearish with the stock. It expects net income to decline by 6.98% a year for the next 5 years.
Assuming that it returns to its historical profitability, it could earn as much as $0.50 per share a year. This seems conservative as it has reached peak profitability of around $1.8 per share. At 10 times historical multiple, the stock could trade at $5 per share. This implies an upside of 80% from current levels. But, it would not trade at these levels until the company returns to profitability. At the rate that the company is going, it would take a while before this would happen.