Nokia Remains Windows Phone Top Vendor But Faces Uncertain Outlook

| About: Nokia Corporation (NOK)
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Quick Take

  • Nokia (NYSE:NOK) accounts for close to 80% of the Windows Phone market.
  • Mitigates concerns of Nokia facing the same competition in WP as in the Android market.
  • Though it’s still early days, initial usage data shows WP was a better choice for Nokia than Android.
  • Long-term prospects are still cloudy as WP’s future is uncertain in a highly duopolistic marketplace.

Nokia’s faith in Windows Phone seems to be paying off for now. Not long after Nokia announced a strong set of Q4 results last month, we have AdDuplex’s February issue of Windows Phone usage stats show that Nokia continues to dominate the WP market [Windows Phone Device Stats for February 2013, AdDuplex, February 12, 2013]. According to the report, Nokia has a 78% share of the market, compared to HTC’s 14% and Samsung’s (OTC:SSNLF) 6%. What is reassuring for the company is that in the past three months, Nokia has managed to gain a couple of percentage points in market share at the expense of Samsung, as has HTC. Considering that Samsung and HTC are heavily invested in Android, we believe this to be an accurate representation of the amount of commitment that each of these handset makers have towards the Windows Phone platform.

Windows Phone Gives Nokia Its Best Chance

The report helps put to rest concerns about Nokia not benefiting much from going with Windows Phone given that the handset maker isn’t Microsoft’s exclusive partner. Further, it backs Nokia’s reasoning that Windows Phone has given it a much better chance than Android – at differentiating itself from rivals and surviving in an industry that is dominated by the duopoly of Apple and Samsung. The report also shows why Nokia has steadfastly shown its commitment to Windows Phone despite repeated calls to hedge its bets by developing Android phones as well.

We find it hard to ignore the logic behind Nokia’s argument. Going with Android would have put Nokia in direct competition with not only Samsung and HTC, but also Sony, LG and a horde of handset manufacturers in the emerging markets. It would have entered the Android fray a little too late, struggling not only to differentiate itself from the crowd, but also against the marketing might of Samsung. We are already seeing the amount of control Samsung is exerting on the Android ecosystem, and rivals such as HTC struggling to compete despite bringing to market highly competent phones. It is important to remember that HTC’s decline followed its rise to the top of the U.S. smartphone market in Q3 2011. Considering that Nokia is coming from lows in the smartphone industry, it is tough to see how Nokia would have fared any better had it sided with Android.

Moreover, Windows Phone allows Nokia to get more marketing might behind the Lumia brand. Not only is it in the interest of Microsoft to promote the platform, but also for the carriers who are looking to increase competition in their supply chain and gradually decrease the impact of smartphone subsidies. With Android, Nokia would have been on its own since Google has no reason to promote the Lumia, considering Android’s already rising popularity and its own acquisition of Motorola’s hardware assets.

Uncertainty Still Persists

We believe that adopting the Windows Phone has given Nokia a fighting chance in the smartphone industry, but its long-term ambitions are still tied to the sustainability of Windows Phone, as a viable third alternative to iOS and Android. There is currently a lot of uncertainty surrounding BB10′s reception in the markets, but if the new OS has put BlackBerry back in contention, Windows Phone might have to start eating into Android’s and iOS’ market share in order to grow – the odds for which seem pretty low. Despite Lumia’s strong holiday quarter, it is tough to say which way market share might swing in the coming years. Accounting for this risk, we estimate that sales in the developed markets account for less than 10% of our $5 price estimate for Nokia.

Still, we continue to believe that even a small improvement in Nokia’s handset business, together with its patent monetization initiatives and the ongoing turnaround in the wireless infrastructure joint venture with Siemens, should help it realize what we expect to be fair value of Nokia’s stock at this juncture. Trefis’ $5 price estimate for Nokia is about 25% ahead of the current market price.

Disclosure: No positions