The Legitimacy of Nokia’s Rise

Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Friday’s abbreviated trading session saw shares of smartphone maker Nokia (NYSE: NOK) jump by nearly 8% to cap off a 21% rise on the week. It has been so long since this type of positive news has been associated with the beleaguered hardware manufacturer that it may cause you to double check the numbers – they are correct.

Driving the stock’s performance has been unexpectedly strong initial demand for the company’s Lumia 920 that runs on Microsoft’s (NASDAQ: MSFT) Windows 8 platform. Ultimately, with a share price below $4, Nokia has sufficient upside potential to make it an interesting, yet speculative, play at current levels.

Early Sales

Initial sales of the flagship Lumia 920 have been surpassing expectations in both the U.S. and Europe, with many retailers reporting that the phones are selling out. The Next Web is reporting that the device is “all but sold out on both Amazon [(NASDAQ: AMZN)], and AT&T’s [(NYSE: T)] website, indicating potentially high demand.” Amazon is experiencing delays of a few weeks, while AT&T is limited to white handsets left in stock.

Strong sales in Europe led Ilkka Rauvola of Danske Bank Markets to raise his rating on the stock from a sell to a buy. Additionally, Mr. Rauvola raised his 2013 sales estimates from 23 million to 36 million units, stating: “It’s just the beginning of the sales ramp. This hasn’t even started in all countries yet. We don’t have complete visibility.” The European aspect of demand is of particular importance for Nokia as it, and the Microsoft platform, push to become of even greater relevance.

The Microsoft Element

The initial success of the new device is of significant importance to both Nokia and Microsoft. For Nokia, strong numbers should provide some evidence that the company made the correct decision when it chose to partner with Microsoft. Prior to the alliance, Nokia was working on its own operating system with very little success. Obtaining some market penetration for the new Windows 8 phones is critical to the company’s future.

For Microsoft, the warm reception may be less critical, but has even further-reaching implications. Microsoft is not as reliant on smartphone sales as is Nokia, but as the company has made a dramatic push towards an across-the-board rebirth, gaining a solid footing in the smartphone market is important. While not lacking in some flaws, the Microsoft Surface tablet has been well received; the ability of the company to cover both the tablet and smartphone arena is important if Microsoft is to move back into the limelight. When coupled with Windows 8, Microsoft’s Xbox Music service and other new rollouts, a solid showing for the Lumia bodes well.

Trading Nokia

While last week’s rise has altered some of the critical metrics of the stock, the strong week may serve as an ongoing catalyst for the company. At current levels, the stock carries a 5% dividend yield, which should be seen as a significant sweetener. Much has been made of the role of dividend income in the year ahead with the fiscal cliff looming, but in a yield-scarce investment landscape, the dividend is attractive. The strong showing by the device and the stock suggests that you may be able to take Nokia off the potential “dividend trap” list.

While the stock’s share price has risen a bit beyond where I might consider it a buy as a perpetual call option play, below $4 per share there are still some of these characteristics to consider. Nokia should still be considered a speculative play, but based on strong initial indications, the company has a future. If you have the ability to allocate a small amount of capital to speculative plays with high return potential, Nokia is worth considering.

Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of and Microsoft. Motley Fool newsletter services recommend, Microsoft, and AT&T.; 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!

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