Okay, I'll Admit It

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

I have a hard time admitting this, because honestly I've doubted this company for a while. However, I'll give in and admit I've considered buying Nokia (NYSE: NOK). I wrote a post about a month ago, suggesting that the value of Nokia as a whole could be worth more than the current stock price. The short version of that piece was the value of the company's patent portfolio compared to other patent related deals makes Nokia worth more than many investors seem to think. As an unabashed Apple (NASDAQ: AAPL) Mac fan, I have to say I've been intrigued by Microsoft (NASDAQ: MSFT) Windows 8 enough to read up on it and even play with some tablets and laptops at my local Best Buy. While there were some positives and negatives I came away with, let me tell you what intrigues me about Nokia as an investment.

They Don't Have To Win For Investors To Benefit:

To be blunt, Nokia missed the boat with the move to smartphones and no matter how well they sell feature phones or regular phones; I'm not convinced this market will stick around. Over time the inevitability of smartphones taking the majority of market share worldwide is a near certainty. You can see this vast shift in the United States already. In fact, in their recent quarter both AT&T and Verizon reported that more than 70% of new phones sold were smartphones. I understand that globally this won't happen for a while, but any company not fully invested in the best of the smartphone world is already playing from a losing position. Recent figures show Google's (NASDAQ: GOOG) Android system with about 75% market share and iOS comes in second at about 14%. This leaves very little room in the market for a third player. That being said, I think that the Windows 8 Phone has a future. While it may never carry the majority of smartphone sales, and it might not even take second place, it doesn't need to. In order for Windows 8 Phone to be successful it only needs to place a strong third. In fact, I would argue that for Nokia to benefit, they need to just be noticed. This is a rare situation where the market is so huge that even a third place finish will make a nice investment.

Stop Talking About Everyone Else And Educate Customers On Lumia:

Unfortunately, what Nokia is most noticed for at this time is terrible results. There isn't much positive in the company's recent earnings. The company's revenue was down 19% and operating profit dropped 69% on a year-over-year basis. While I know that the company's Nokia Siemens Networks division surprised some with better than expected results, I still think this unit is served better by being split off as a separate company. What Nokia needs to do is focus on its Devices & Services and the complimentary Location & Commerce division. When you compare Nokia's top Windows 8 Phone to arguably the two most popular smartphones, the unit stacks up fairly well. Two of the most popular phones are the iPhone 5 and the Samsung Galaxy SIII. They both lead the way in smartphone design and sales, and both Apple and Samsung spend a lot of money advertising these units. Nokia needs to stop putting out ads putting down their competition, and just tell potential customers what the Lumia lineup can do. The company claims that its Nokia Maps and photo optics on the Lumia lineup are second to none, stop talking about everyone else and help customers understand why they should choose a Nokia.

What Is The Solution To Terrible Results?

To say that Nokia's Devices & Services division is doing terrible would be too nice of a compliment. With sales down 34% overall, and some regional sales dropping as much as 78%, it's time for a change. The company's smartphone sales were horrible too, with sales down 56% and volume down 63%. Even the company's former strength of feature phones, reported sales down 19% and volume down 15%. Just to put in context the struggle Nokia faces in trying to get Lumia devices adopted, consider that in the last three months the company sold about 2.9 million of these devices. In the first three days, Apple sold more iPhone 5's than Nokia sold in three months. It seems obvious from these results that Nokia isn't telling its story clearly to potential customers. This is no doubt hurting the company's financials as well with negative operating cash flow of $429 million versus $852 million positive cash flow last year. Net cash and other liquid assets took a hit as well, down 15% sequentially and 30% year-over-year. The solution is to actually jump with both feet into the pool.

Go All In Or Go Away:

Nokia is still trying to market Windows 8 Phone and develop the Symbian and MeeGo operating systems. The company needs to cut to the chase and just pick one. The choice is pretty obvious, Windows 8 Phone is their smartphone future, and it should be running any phone that will require a data plan. While companies like Samsung and HTC produce Android phones and are beginning to introduce Windows 8 Phones as well, they have the capital and market position to do so. Nokia needs to get with the program and make Windows 8 Phone its choice. This would allow its development teams to focus on making their Windows Phone experience the best, instead of diverting attention to other systems.

Why Would I Consider Nokia Given The Evidence To The Contrary?

There are four good reasons to consider Nokia at this time. First, investors can't ignore the potential value of Nokia in a buyout. The sum of the parts appears to be worth more than the company's roughly $10 billion market cap. Second, if the company does make a clear choice of Windows 8 Phone, I believe this lineup can take market share and become a relevant third option. Looking at today's market share figures is a useless exercise because Windows 8 Phone was just introduced. If this new system can get the attention of a hardcore Mac fan like myself, I have to believe that others attention will be diverted as well. Third, Nokia's results are coming off the transition from Windows Phone 7 to Windows 8 Phone. The more Lumia phones become available on multiple carriers, the better the penetration of the brand. Fourth, the company can improve its fortunes tremendously by improving its cost structure. Consider in the last three months, Nokia's gross margin was 27.50%. By comparison, Apple, Google, and Microsoft each generated net margins of at least 25%. This shows that Nokia can change its pricing structure and costs to compete more effectively with its competition. Bottom line, the company's recent smartphones can compete on features with the best in the market, and as Windows Phone gets more support from carriers, Nokia should benefit. If the company is already worth more than its market cap based on a sum of the parts valuation, imagine what the stock is worth if Nokia can compete effectively with other handset manufacturers. 

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