Why Nokia Is a Historical Turnaround in the Making

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Believe it or not, the same company that had to pay the enormous consequences of missing the smartphone revolution for years is now having an amazing 52-week performance. In fact, with an unbelievable 135.1% price increase, Nokia (NYSE: NOK) is by far the best performing stock among the most popular mobile device manufacturers, which include Apple (NASDAQ: AAPL) and Blackberry (NASDAQ: BBRY).

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Nokia, ladies and gentlemen, could soon make history once more. It may become an impressive case study, a must-read in all MBA programs: how a company once had it all, lost it by missing the smartphone revolution, but managed a turnaround in the end, after years of patient hard work.

Miracles can happen: The Lumia case

Behind Nokia's recent success is its smartphone model Lumia and its outstanding performance in the past months. To begin with, in the latest quarter, Nokia managed to sell 7.4 million Lumia devices, quite better than the 5.6 million figure for the March quarter. The downside is that the average selling price, or ASP, for Lumia phones decreased 14% sequentially, which indicates that Nokia is in the middle of an intense price war for market share, targeting price sensitive consumers. However, since Nokia has been quite active in product releases for the low to mid-end smart phone market (see the Lumia 520 model), it is natural to expect a decrease in ASP.

Sell side analysts were disappointed at the 7.4 million figure, but this is no reason to become a bear. Keep in mind this represents a 32% increase from the previous quarter. It is also above management guidance (27%). Now, if you were to see the long run sales growth trajectory of Lumia devices, you will find out that Nokia is recovering significant market share against, for example, Blackberry devices. As a matter of fact, the number of Lumias sold in the last quarter is higher than the number of all phones sold by BlackBerry in the same quarter.

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I expect Lumia to continue outperforming in terms of sales: Nokia offers so many types of Lumias that it basically has all the market covered with different price points. Furthermore, it is aggressively addressing the promising low to mid-end segment, while companies like Apple are not. 

Feature phones

Feature phones are not doing so well, and Lumia sales are not yet high enough to offset the negative effect coming from the feature phone shrinking market. The number of feature phones shipped fell from 84 million units to 62 million units year to year. Also, the average sale price for these phones fell from $62 to $59.

The good news is that although Nokia feature phone sales are shrinking, the company is committed to develop better feature phones, as the recent release of the Nokia 207 and 208 (which, for $68 per unit, offers 3G radios, Internet connection sharing, 30-day standby times and a camera) proved. This could help to make the shrink pace slower. 

The Nokia & Microsoft partnership

So far, the decision Nokia made of abandoning Symbian and MeeGo in order to focus its development entirely on the Windows Phone Operating System has proved a very wise business decision. Nokia not only benefits from using a secure OS (according to Symantec, Windows only has 2 documented vulnerabilities) with a strong brand in the corporate world, it also receives $1 billion a year from Microsoft as a compensation for focusing on developing only for Windows Phone.

Both companies are struggling to create a third ecosystem in the smartphone world, and they may succeed next year as Lumia sales continue increasing. Microsoft, on the other hand, is providing an integrated experience across all of its platforms (tablets, PCs, Xbox and smartphones) in order to make the transition of Windows PC users to Windows Mobile much easier and comfortable.

Nokia Siemens Networks (NSN)'s operating margin is improving 

Apart from smartphones and feature phones, Nokia has one more business unit: NSN, which specializes in research and development of mobile communication infrastructure. NSN's focus is mobile broadband, and considering this market has experienced sustained growth in the past years, the plans of Nokia to fully acquire NSN during the third calendar quarter of 2013 makes a lot of sense.

Although NSN's revenue is down 11% from the year-ago quarter, the 12% increase in adjusted operating margin looks attractive. If things go north, China Mobile's massive project to build a 4G TD-LTE network in China could imply much stronger sales in the last quarter of 2013.

The smartphone war isn't over 

A turnaround is never easy, especially in a market where Apple and Samsung together have more than 80% of it. Palm couldn't make it and BlackBerry is struggling to survive. In this context, the moderate success of the Lumia is admirable.

However, Nokia and Microsoft are still far away from establishing successfully the Windows Phone OS as a third ecosystem. But we should not forget that Nokia is still a strong player in the mobile phone market, and a very appealing brand to price sensitive users in emerging markets. Unlike Apple, Nokia has top-selling budget devices. And unlike Blackberry, Nokia doesn't have to promote its own ecosystem. It leaves that job to Microsoft and instead focuses on developing better, cheaper smartphones.

How about the shrinking feature phone market? Sure, many of Nokia's customers still use feature phones, but as both their income and the smartphone penetration rate in their economies increase, they could make the transition to the smartphone. This could lead to massive sales in the future and consolidate Nokia's historic turnaround. In this way, Nokia's story in the smartphone market isn't over. It's about to start. 

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Adrian Campos has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. 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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