Nokia Is a High Risk High Reward Stock

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Can Nokia (NYSE: NOK) make a comeback?

In its Q2 earnings report, Nokia wrote, “Nokia expects its non IFRS Devices & Services operating margin in the third quarter 2012 to be similar to the second quarter 2012 level of negative 9.1% plus or minus four percentage points.” Nokia has three main businesses: Devices & Services, Location & Commerce, and Nokia Siemens Networks. Devices & Services sells smartphones and feature phones. Location & Commerce focuses on the development of the Nokia Location Platform, which includes Nokia Maps. Nokia Siemens Networks focuses on providing mobile broadband infrastructure to customers.

Devices & Services accounted for about 53% of total revenue in Q2, so Nokia is really predicting more big losses to come in Q3. However, the key for Nokia is what happens after Q3. Currently, there are some signs that things are turning around at Nokia, although they can be attributed to Nokia just bouncing back from a very low level. In Q2, Location & Commerce and Nokia Siemens Networks had positive non-IFRS operating margins of 14.5% and 0.8%, respectively. In comparison, in the previous quarter Q1, Location & Commerce and Nokia Siemens Networks had non-IFRS operating margins of 12.9% and -5%, respectively. However, Nokia’s comeback is completely dependent on a comeback in smartphones.

The following table shows smartphone market share in the past two quarters compared with the previous year (IDC).

<table> <tbody> <tr> <td>Mobile OS (millions)</td> <td>2Q12 Shipments</td> <td>2Q12 Market Share</td> <td>1Q12 Shipments</td> <td>1Q12 Market Share</td> <td>2Q11 Shipments</td> <td>2Q11 Market Share</td> <td>1Q11 Shipments</td> <td>1Q11 Market Share</td> </tr> <tr> <td>Android</td> <td> 104.8</td> <td> 68.1%</td> <td> <p>89.9 </p> </td> <td> 59.0%</td> <td> 50.8</td> <td> 46.9%</td> <td> 36.7</td> <td>36.1% </td> </tr> <tr> <td>iOS</td> <td>26.0 </td> <td>16.9% </td> <td>35.1 </td> <td>23.0% </td> <td>20.4 </td> <td>18.8% </td> <td>18.6 </td> <td>18.3% </td> </tr> <tr> <td>BlackBerry</td> <td>7.4 </td> <td>4.8% </td> <td> <p>9.7 </p> </td> <td>6.4% </td> <td>12.5 </td> <td>11.5% </td> <td>13.8 </td> <td>13.6% </td> </tr> <tr> <td>Symbian</td> <td>6.8 </td> <td>4.4% </td> <td>10.4 </td> <td>6.8% </td> <td>18.3 </td> <td>16.9% </td> <td>26.4 </td> <td>26.0% </td> </tr> <tr> <td>Windows</td> <td>5.4 </td> <td>3.5% </td> <td>3.3 </td> <td>2.2% </td> <td>2.5 </td> <td>2.3%</td> <td>2.6 </td> <td>2.6% </td> </tr> <tr> <td>Linux</td> <td>3.5 </td> <td>2.3% </td> <td>3.5 </td> <td>2.3% </td> <td>3.3 </td> <td>3.0% </td> <td>3.2 </td> <td>3.1% </td> </tr> <tr> <td>Others</td> <td>0.1 </td> <td>0.1% </td> <td>0.4 </td> <td>0.3% </td> <td>0.6 </td> <td>0.5% </td> <td>0.3 </td> <td>0.3% </td> </tr> </tbody> </table>

As shown, Google (NASDAQ: GOOG) Android extended its dominance to 68.1% in Q2. Apple’s (NASDAQ: AAPL) iOS is second at 16.9%. Together, Android and iOS accounted for 85% of the market. This does not leave much for the rest of the competition. Looking at Nokia, the Symbian OS continued its (expected) decline. This was offset by solid increases in shipments of Microsoft (NASDAQ: MSFT) Windows phones, which grew to 5.4 million shipments and a 3.5% market share. Nokia is the main vendor of Windows phones. In Q2, Nokia shipped 4 million Lumias, which is up from around 2 million in Q1.

Currently, there is plenty of room for a third OS (maybe even a fourth) in the smartphone market because there is a great number of people still using feature phones. In Q2 2012, feature phones accounted for 62% of total mobile phones shipped. Research In Motion (NASDAQ: BBRY) is battling Microsoft and Nokia for this third spot in the smartphone market. In this battle Microsoft and Nokia have the advantage because Windows 8 is going to be launched on October 26. Meanwhile, RIM has BB10 pegged for the beginning of 2013.

Overall, Nokia is making the right moves. In June, Nokia launched the Nokia Asha 305, Nokia Asha 306, and Nokia Asha 311 full touch feature phones. The phones should help fend off cheap Android smartphones. In the smartphone side, Nokia is pumping out Lumia phones. In Q2, Nokia increased its lineup with the Lumia 610, the lowest priced Lumia. Additionally, Nokia has already built its next generation Windows 8 smartphones, the Lumia 820 and Lumia 920.

The Lumia 920 is a hardware beast. It has a 332 ppi super sensitive 4.5 inch touch screen display. The “super sensitive” means that the phone can be used while wearing gloves. The phone comes with LTE, wireless charging, and NFC. Additionally, the 920 comes with a dual core 1.5 GHz Snapdragon S4 and an 8.7 Megapixel PureView camera. CNET has a good review of the phone. Basically, the Lumia 920 is a smartphone that can slug it out with the best. If the camera is as good as Nokia claims (it does have a f/2.0 relative aperture), it could arguably be the best smartphone on the planet when it is released.

Overall, Nokia has a good shot at a comeback. Although Nokia’s comeback depends on Windows, there is plenty of room for a third OS in the smartphone market because many people are still using feature phones. Also, Microsoft has the first shot at that position and a Windows success would likely result in a Nokia success. Additionally, Nokia is being paid by Microsoft to support its OS. Thus, the benefits are twofold. Nokia differentiates its phones from Android and gets paid to use Windows. This is cheaper than using Android, which is only free. Finally, Nokia's other business segments, Location & Commerce and Nokia Siemens Networks, seem to turning around.

Looking forward, the Lumia 920 is competitive against the best smartphones. The Lumia 920 has everything buyers look for in a flagship smartphone. It has a big battery, nice screen, nice camera, LTE, and a powerful processor. NFC, super sensitive display, and wireless charging are nice additional features. Also, the Windows 8 Phone OS provides major upgrades to Windows 7.5. Overall, the Lumia 920 has a good shot at selling well. However, taking everything into account, Nokia still faces major risks. The company will likely have an ugly Q3. Furthermore, it competes against Samsung, Apple, Google, and other Android phone manufacturers. However, Nokia has many fans, Microsoft, and the Lumia 920. For investors who like high risk high reward plays, Nokia is a worthy investment.

Alvin owns shares of Microsoft. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services recommend Apple and Google. 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.

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