Nokia Lumia 920 Price: Champagne Taste And Beer Money

| About: Nokia Corporation (NOK)
This article is now exclusive for PRO subscribers.

Prior to this Holiday Season, Nokia (NYSE:NOK) will launch its Lumia 920 smart phone. By many accounts, the Lumia 920 represents Nokia's last stand to stop the bleeding financially and preserve its business. Following last quarter's $2 billion loss, Nokia is now effectively forced to take a knife into a gunfight, in hopes of carving out territory within the fiercely guarded Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG), and Samsung (OTC:SSNLF) oligarchy. With prospects for bankruptcy always looming, Nokia's management and shareholders cannot afford to take risks. Reports out of Europe, however, indicate that the unlocked Nokia Lumia 920 will open for business between $700 and $850. At this price point, Nokia is competing on perceived quality, rather than nominal value. History will repeat itself, if Nokia is forced to slash prices over the next two quarters to move product. Nokia operates with little to no goodwill.

Consumer Electronics Ecosystem

Apple's memorable "I'm a Mac. I'm a PC" campaign crystallizes today's consumer electronics market. With this series of advertisements, Apple personifies itself as a young and eager to please hipster. Alternatively, Microsoft (NASDAQ:MSFT) is a company man in a tweed suit, who cannot get out of his own way. Against this backdrop, Apple's ecosystem includes blockbuster iPod, iTunes, iPhone, iMac, and iPad product lines. During its third fiscal quarterly period ended June 30, Apple reports 26 million iPhone unit sales. For Q3 2012, the iPhone centerpiece accounts for $16 billion of Apple's $35 billion in total net sales. Microsoft, by definition of its core business, must hitch its wagon to a flailing personal computer industry and play from behind to shake its dowdy image.

The Steve Jobs halo effect now transitions into a rigid hierarchy dominated by Apple, Samsung, and Google. A recent comScore report indicates that Apple iOS and Google Android serve 87% of the smart phone market. At the bottom of the heap, Microsoft and Nokia partner up in hopes of ultimately expanding upon their joint 4.3% share. Apple, Google, and Samsung continue to consolidate strength, in contrast to Lumia 900 sales that Stephen Elop, Nokia CEO, describes as "mixed."

Nokia cannot afford another failed Lumia Windows phone launch. Lumia 900 sales were mixed, despite the high praises of Jobs' right-hand man Steve Wozniak, Nicki Minaj concert promotions, AT&T (NYSE:T) and Microsoft marketing machine dollars, and one $100 mail-in rebate that effectively gave these phones away free for one month. Prior to the launch, Jeff Bradley, AT&T executive, promoted the Lumia as a "notch above anything [the carrier has] ever done." This time around, however, AT&T brass will be less likely to throw its weight behind a Lumia 920 launch. The AT&T subscription model calls for the carrier to subsidize product, or sell phones at an immediate loss, in hopes of generating regular cash flow through long-term service agreements.

The Lumia 900 was a prospective bargaining chip, where AT&T saved hundreds of dollars in upfront subsidies on cheaper Nokia phones sold at the expense of the Apple iPhone. Alternatively, the unlocked Nokia Lumia 920 retails at a comparable price point to the iPhone 5, which eliminates phone subsidy cost advantages between these two platforms on the AT&T sales floor.

Nokia Lumia 920 Specifications

Dan Costa and PC Magazine describe Windows 8 as a "huge gamble" for Microsoft. Microsoft now offers a fusion of traditional personal computer, tablet, and smart phone interfaces beneath this new Windows 8 software umbrella. On October 26, Microsoft will launch Windows 8 alongside its Surface tablet. The versatile Surface machine bridges the gap separating tablets and notebook computers, as it easily converts into a Microsoft Office workstation capable of printing documents. In the event of a tepid Windows 8 release, Redmond headquarters would still mint cash through software licensing, while Microsoft shares track the S&P 500 and pay regular dividends.

For Nokia, however, anything short of a blockbuster Windows 8 release would prove disastrous. As a standalone entity, the Lumia 920 offers little differentiation to compete effectively against Samsung handsets alongside Apple iOS and Google Android ecosystems for profit. Qualcomm's dual-core 1.4 GHz Snapdragon processor powers both the Lumia 920 and Samsung's ATIV S Windows 8 phone. In terms of appearance, the Lumia presents a short and stocky look similar to dated versions of the Apple iPhone. In a series of Olympic advertisements, Samsung effectively markets its Galaxy SIII as a stand-in track and field baton. After the success of Samsung's campaign, Apple engineers have followed suit and designed an iPhone 5 that is also more so vertical.

The Nokia Lumia 920 phone is most notable for the clarity of pictures taken with its 8.7-megapixel camera. Technology enthusiasts, such as Edgar Alvarez, write up solid reviews for Nokia Maps. Nokia executives intimate that their mapping application is superior to both Google and Apple Maps. For navigation, however, consumers can always stop at the local Exxon (NYSE:XOM) service station and simply ask for directions.

The Bottom Line

At this point in the smart phone product cycle, commoditization is working strongly against Nokia. On September 5, Nokia produced a demonstration for its Lumia 920 phone in New York City. Wall Street remains largely unimpressed, as traders immediately entered orders to sell off Nokia stock towards a 15% loss that very same day. The Lumia 920 is a solid, but far from revolutionary machine. As such, Nokia will not be able to ship out enough units to counteract a 30% decline in smart phone sales over the prior quarter. For the mere sake of survival, Nokia must resort to financial engineering.

Nokia can save roughly $1 billion over the next year, if it were to cancel its 26-cent per share dividend. From there, Nokia can consider a systematic break up of its business into services, hardware, software, and intellectual property, in order to unlock shareholder value. Investors must be aware of the fact that Google recently closed a $12.5 billion deal to acquire Motorola. The acquisition of Motorola patents is a defensive move to protect Google Android against litigation. This transaction may serve as proof that Apple, Google, and Samsung are all in the market for patents, but have chosen to bypass Nokia's portfolio.

Theoretically, the $10 billion in goodwill and intangible assets should be significantly written down, because these line items are not being leveraged at a profit. Until this point, Nokia has largely preserved cash flow and bought time through job layoffs. Despite losing $2 billion during quarterly period ended June 30, Nokia only suffered a mere $68 million decline in cash and cash equivalents during this time frame. For the year, however, Nokia is grinding through a $720 million decline in cash position.

Nokia's $41 billion balance sheet can be broken down further to $13.7 billion in financial assets to cover $7.2 billion in interest bearing liabilities. With these financials, Nokia has another twenty-four months to introduce a blockbuster product to market, or die trying.

Conservative investors should cash out of Nokia stock now, rather than risk being left holding a toxic bag of assets heading towards zero.

Disclosure: I am long AAPL, XOM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.