Sticking with the Nokia Surge

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

Nokia’s (NYSE: NOK) stock price has risen significantly since Jan. 10, when the company reported sales of its Lumia smartphones. Check out the following chart.

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NOK data by YCharts

Back on Nov. 12, I wrote a post titled “Buying Nokia? Now Looks Like a Good Time.” The post’s main thesis was that the holiday quarter presented a great opportunity for Nokia to make a lot of progress on its turnaround. The main reasons given were that Nokia had made positive strides in its other business segments, it had recently launched its new flagship smartphone, the Lumia 920 (which has really good hardware and received good reviews), the smartphone market has a lot of room to grow, and it was the holiday quarter. These reasons along with the decline in stock price after the 2012 elections provided a good opportunity for investors bullish on Nokia to buy shares.

When making a risky investment on a turnaround, investors should always set business goals that they want the company to meet during a set period of time. If the company fails to meet the goals, then investors should sell out of the investment. This strategy helps keep investors disciplined. In the case of Nokia, the company is mainly battling against Apple (NASDAQ: AAPL) and companies using Google (NASDAQ: GOOG) Android. Nokia is betting its future on Microsoft (NASDAQ: MSFT) and the Windows Phone OS. Since the holiday quarter presented the best opportunity for significant progress in Nokia’s turnaround, no sequential improvement in financial results meant that investors should sell their shares.

Nokia Delivers

Nokia’s preliminary numbers are good. The company reported sales of 4.4 million Lumia smartphones. In comparison, in Q2 and Q3, Nokia shipped 4 million and 2.9 million Lumia smartphones, respectively. Also, the new Lumia smartphones were released in the beginning of November and as a result were only available for two months in the quarter. In addition, sales of Lumia smartphones were coming off a lull in Q2. Thus, it is likely that the sales number does not fully represent the demand for the new generation of Lumia phones.

Most importantly, Nokia reached somewhere between break even and a positive 2% non-IFRS operating margin for its Devices & Services business segment for the fourth quarter. In comparison, in Q2 and Q3, this number was a negative 9.1% and 7.4%, respectively. Out of all its business segments, Devices & Services provides most of the company’s net sales. Devices & Services includes sales of smartphones and feature phones. Additionally, the Nokia Siemens Networks delivered record underlying profits. In Q3, the Nokia Siemens Networks generated 48% of Nokia’s net sales.

Keeping It Simple

While Nokia has climbed a lot recently, the company is still far from its potential. Back in 2007, Nokia earned $10.5 billion, which at a modest PE of 10 would put Nokia’s stock price at around $28 per share. Since the stock price is still way below its potential and the company is making progress, investors looking to hit the home run should hang on.

Looking forward, Nokia has a lot of work cut out for it. Apple and Android are not easy opponents. In Q3 2012, Android and iOS controlled 75% and 14.9% of global smartphone shipments, respectively. Windows only had a 2% market share. Additionally, Research In Motion (NASDAQ: BBRY) is looking to make a comeback with BB10, which is scheduled to launch on Jan. 30. The company reported that it still has 79 million users. Additionally, RIM held a developer competition over the weekend during which developers added 15,000 BB10 apps in a span of two days.  

For Q1, Nokia gave a preliminary outlook of non-IFRS Devices & Services operating margin of negative 2%, plus or minus 4%. Nokia Siemens Networks is expected to generate a non-IFRS operating margin of around 3%, plus or minus 4%. However, Q1 is seasonally a slow quarter and the projected numbers are better than the results from Q1 2012. The projected Location & Commerce margin is lower, but this business segment is relatively small.

Overall, Nokia looks like it is heading in the right direction. Additionally, there are no obvious dangers from competitors that threaten to derail the current progress Nokia is making. The smartphone market is still growing so there is plenty of room for everyone. It should be emphasized that Nokia remains a high-risk, high-reward stock.

iamgreatness owns shares of Microsoft. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, 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!

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