An Update On This Turnaround
Callum is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A Hail Marry Investment
A while back I recommended buying Nokia Corp when it was trading at $2.50 in this article. I said that Nokia's stock was pricing in the Lumia 920 phones being a flop. Recent events point to that not being the case, and here is an update on this exciting turnaround. Nokia has teamed up with Microsoft (NASDAQ: MSFT) and is spearheading Mr. Softy's new mobile OS Windows 8. With Nokia's apparent Lumia 920 success comes a big win for Microsoft as well, as they have barely been able to gain any traction in the mobile space. Now it seems that has changed.
Nokia (NYSE: NOK) is up 44% in the past 3 months as sales of the Lumia 920 seemed to have beaten estimates (a very low bar but still) and that Nokia will be able to get into the world's largest mobile phone carrier, China Mobile. The really big news is that China Mobile will subsidize the cost of Nokia's 920T phones (on a 2 year contract with a data plan). This will bring down the cost to 1 yuan, or less than 20 cents in US currency. Aka, free. This provides Nokia with a huge chance at turning themselves around and becoming a serious competitor again.
China Mobile has 707 million customers, and is planning on spending only $4.1 billion on phone subsides in 2013. That is why it is so crucial for phone makers to secure China Mobile's favor. What's even better is that China Mobile has "hinted" that it isn't going to subsidize iPhone's because of the unbalanced offer Apple (NASDAQ: AAPL) is trying to force them to get into. So while iPhone's will cost around $740 (in a population where the average wage is $2,500 a year), the Lumia 920 will be virtually free. This is going to be HUGE for Nokia. Nokia's market share in China has been in free fall over the past few years, but now Nokia has a chance to turn that around. UBS has increased the number of Lumia phones they expect to be sold in 2013 and 2014, which is very bullish for Nokia shareholders. Already Lumia phones are selling out in China, with phones selling out in 2 hours after word hit the street that Nokia's flagship store in China had just received a shipment. One thing Nokia has to get better at is making sure supply meets demand. They underestimated how many phones they would sell and now it is hurting them a little. On the plus side, it is much better to have a lot more demand than supply, as opposed to having too much supply and little demand. Also, Nokia recently signed a deal with 360.com (one of China's largest e-retailers) worth $321 million for 360 to sell Nokia's phones online. In this quarter Nokia had a 3.63% of the Chinese smartphone market share. That is down very sharply from 18% last year, which is why Nokia is pushing so aggressively into China.
Another reason why Nokia shares have gone from their $1.68 low to $4 is because of a strong reception in the US. AT&T, the exclusive seller of the Lumia 920 phones in the US reported strong demand for the new phone. The Lumia 920 was the third bestselling smartphone for AT&T, behind the iPhone 5 and Samsung Galaxy S3. The Lumia 920 also had a very strong showing on Amazon and was topping the best seller charts for a while with 2 week wait times reported. To be fair you have to take into consideration that low supply also had a hand in that, but overall this is still very good news for Nokia and Microsoft.
When the Lumia 920 was released in Germany back in November there were numerous stores that were sold out. In Sweden the telecom company Tele2 also reported that it was all sold out as well. While supply issues were also present in both instances, demand seems to be stronger than expected. One big thing that is helping out Nokia is that the iPhone has only 2 LTE networks it can connect to in Europe, while the Lumia 920 has 12.
Nokia's stock has done very well on rumors that the Lumia 920 is selling very well, but we won't get the full picture until January 24 when Nokia reports its next earnings. Then we can see just how well the phone sold over the holiday season. So far the response seems pretty bullish, especially when a lot of people were predicting a complete flop like last time with Windows 7. The really big catalyst in Nokia's future is in January when subsidized Lumia 920T phones go on sales in China. When that happens expect a big spike in Nokia's stock price. Why? Because Chinese consumers will be able to buy the phone for virtually "free", if they get the 2 year contract. That will make phones with a hefty price tag like the iPhone 5 look a lot less attractive. While rumors are just rumors and concrete facts are the best things to invest in, Nokia's future seems bright. I will write another update after Nokia's earnings release to keep you posted on this turnaround play. Still bullish on Nokia.
callumturcan owns shares of Microsoft and Apple. The Motley Fool owns shares of Apple and Microsoft. Motley Fool newsletter services recommend Apple and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!