Can Windows 8 Push This Stock Higher?
Dr. Osman is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Nokia (NYSE: NOK) has placed a bold bet on its Windows Phone devices. The company hopes to achieve a better market position with the support of Microsoft (NASDAQ: MSFT) partnership. Nokia has been struggling for quite some time as fierce competition from iOS and Android has caused sales to plummet. Can Nokia achieve its former glorious days in the market?
The Finnish manufacturer is not giving up. It is taking action in order to achieve sustainable growth rates. A number of job cuts, as part of a broader transformation strategy, have provoked serious concerns. However, the company is fully committed to generating fruitful cash flows. Nokia's strategy consists of three major components: First, make Lumia smart phones stand out from the rest. Next extend its location-based platforms to new industries. And finally improve competitiveness of its smart phone business. How does Nokia plan to achieve all these?
Nokia decided to renew its management team. When a company decides to pursue management changes, this does not imply it is going to do things differently. Nevertheless, it does indicate that the firm is taking its transition process seriously.
Second, Nokia announced sharp operational changes. Some of its plans include the closure of its facilities in Ulm, Germany, Burnaby, Canada, and Salo, Finland. Then, the firm said it is going to implement a series of investments aiming to improve its primary smart phone line. For example, in July, Nokia announced it plans to acquire assets from Sweden-based Scalado in an effort to enhance its imaging technology.
Overall, Nokia's investments and dramatic operational restructuring are expected to reinforce its long-term competitive position. By the end of 2013, annual non-IFRS operating expenses in the Device & Services business are estimated to decline to €3 billion. This translates into a 45 percent decrease in the operational expenses compared to full-year 2010. Well, that sounds good. For Q3 2012, the Devices & Services segment generated more than half of Nokia's total net sales. So, the focus is really on how this business sector is going to perform in the short-term.
Nokia and Windows Phone Market
Q3 2012 financial results revealed a negative 56 percent change in smart devices net sales compared to last year. WP7 smart devices were a bit of a disappointment in terms of trade volume. However, Nokia fully intends to benefit from the Windows Phone market. The WP8 devices are going to be a varying factor in the company's efforts to dominate the market. The new smart phones are the first to use Synaptics's (NASDAQ: SYNA) enhanced ClearPad Series 3 touch-screen technology. Synaptics is famous for its touch-screen solutions. Even most notebooks have products installed by Synaptics. Partially thanks to its collaboration with Nokia, the forward earnings are expected to increase by almost 50% for Synaptics.
For Lumia 920, market acceptance in Europe is elevated. Nokia expects to regain the third position among leading smart phone providers in the region by surpassing Research In Motion (NASDAQ: BBRY) and its delayed BB10. I think RIM is a bit late in transforming itself into the newly adjusted smart phone markets. I do expect similar moves from RIM, but the company has yet to follow Nokia’s steps. It is also losing its ground pretty fast. Nevertheless, with a re-organization plan, I believe it can also be another turnaround story.
In the tough U.S. market, Nokia sealed a deal with leading carrier Verizon (NYSE: VZ) for the first time in three years. When iPhone was first introduced, Verizon did not show much interest in offering it. However, that decision came with a great cost to Verizon, which lost many customers to its competitors. Learning from its past mistakes, Verizon is now offering premium plans on Windows-based Nokia devices.
Overall, in the global smart phone business, Microsoft's operating system is gradually building its market share. Analysts' estimations suggest that Microsoft's OS will carry the second position globally by the end of 2015. People like to use things that are familiar to them. Windows is one of the most common tools people are acquainted with. So, Microsoft it is likely to have a good success in the mobile software as well.
As of July, Nokia held a 59 percent market share in the global Windows Phone Market, way ahead of Samsung and HTC. HTC came second with a 21 percent market share while Samsung ranked third. However, in a survey conducted by ChangeWave Research, Samsung outperforms Nokia in North America. Out of all respondents, 35 percent said they are most likely to buy WP8 smart phone from Nokia. 51 percent responded Samsung. The survey included results as of September 2012 and focused only on U.S.-based customers.
Maybe it is too soon to make any assumptions on Nokia's future performance. Lumia sales are going to be a decisive factor in the company's struggle to rise from the dead. If Nokia significantly improves its smart phone market position by the end of Q1 2013, then we can hope for a serious turnaround. Currently, Nokia is trading at a deep discount, which indicates a value opportunity. The stock's last market close was 60 percent below its 52-week high of $6.39. Nokia is trading with a 74 percent discount to sales and 1.03 times book value. It is unlikely that it can get any cheaper.
Some concerns have arisen from Lumia 920 reviews. The smart phone device is getting a lot of credits, but its ecosystem is considered modest. Even though, the phone is expected to perform respectably, perhaps this is not enough. In the contemporary tech world, perfection is the key to success. If Nokia really wants to make an impressive comeback, there is no room for mistakes.
Interested in Additional Analysis?
It's been a frustrating path for Microsoft investors, who've watched their company fail to capitalize on the incredible growth in mobile over the past decade. However, with the release of its own tablet, along with the widely anticipated Windows 8 operating system, the company is looking to make a splash in this booming market. In this brand new premium report on Microsoft Fool analysts explain that while the opportunity is huge, the challenges are many. Also provided are regular updates as key events occur, so make sure to claim a copy of this report now by clicking here.
ecofinstat has no positions in the stocks mentioned above. The Motley Fool owns shares of Microsoft. Motley Fool newsletter services recommend 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.If you have questions about this post or the Fool’s blog network, click here for information.