AT&T’s Relationship With Nokia Could Ultimately Pay Off

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

In 2012 Nokia (NYSE: NOK) was at the core of heated debate. It had been blackballed by most carriers, and analysts were crying foul about the handset maker, citing that it was hovering in ‘tech limbo’– lost and to be forever forgotten. Nevertheless, a struggling Nokia overcame the overwhelming headwinds and edged its way into the mainstream of the then elusive smartphone market. As of the time of writing, Nokia has made notable progress with its Lumia 820 and 920. Both smartphones have experienced supply shortages due to demand. In light of this progress, the Finnish handset maker is pushing forward to offer a new tablet early this year. Incidentally, this new tablet will first be offered at AT&T (NYSE: T). What does this mean for AT&T?

At face value, it implies that AT&T has the potential of raking in handsome amounts from the initial hype around the tablet. Nonetheless, taking a more insightful look at the matter reveals that there is more at stake for AT &T, both directly and indirectly.

Swelling demand for Windows based tablet

The IDC believes that, although demand for Windows based tablets will start slow, there will be swelling demand for Windows based tablets in future; I concur. The whole idea of a tablet essentially revolves around a quasi PC, so to speak. Considering the dominance that Microsoft’s Windows had in the PC era, it comes as no surprise that consumers will be seeking to stretch this dominance straight into the tablet sector. From 2012-2016, the IDC has projected a compounded annual growth rate of 23.3 percent for tablets, with Windows based tablets expected to gnaw into competitors’ market share. As such, Nokia’s tablet – which is Windows based – is likely to secure strong anchorage in the sector. In addition, this tablet’s success will partly ride on the tailwinds generated from Nokia’s Lumia. I believe that all these factors will translate into more customer additions for AT&T.

In addition to there being high demand for a Windows based tablet, the smartphone market is no longer a ‘duopoly’ dominated by Apple and Google. Consumers' desire for something new other than Android and the iOS has driven demand for Nokia’s handsets, which are mostly Windows based, through the roof. In addition, carriers are trying to avert Apple. Apparently, Apple has a high selling price relative to its peers; something that has had a notable negative impact on the margins of most carriers, AT&T included. This move to avert Apple, if successful, could pan out well for AT&T because demand for Nokia will inevitably increase, leading to more customer additions and more importantly, higher margins.

Focusing on lucrative segments of the industry

I am also impressed by the tact exhibited by AT&T. While consumers still rank it the worst carrier, it has managed to dominate one key area that in my opinion could work out well for the telecom bigwig – 4G LTE. While Verizon (NYSE: VZ), AT&T’s close competitor, has the most expansive 4G network, AT&T was the highest rated 4G LTE network. Considering that 4G networks are relatively new, the importance of delivering quality cannot be overstated. I believe that AT&T’s quality 4G network, despite being overshadowed by factors such as Verizon’s bigger footprint, will pay off incredibly. Customers tend to have an inherent inclination toward quality.

The strategic partnership with Akamai Technologies (NASDAQ: AKAM) also says volumes about AT&T. This partnership will give AT&T a good gateway into the lucrative Content Data Network (CDN) segment. Unlike the Internet, which is typical of congestion, CDN services avert congestion, making them very popular among enterprises. This partnership, which is primarily focused on online businesses within North America, brightens prospects for AT&T. For starters, AT&T has a strong footprint in the North American market and as such, the partnership is likely to attract a lot of customers; especially considering that Akamai will deploy CDN servers at the edge of AT&T’s IP network. Secondly and arguably most importantly, online business is set to grow at a rate bordering on what could be described as exponential. Considering that the scope of operations is set to expand to the international market after a year, AT&T’s long term picture with regard to the Akamai alliance only gets brighter. This is especially so if the partnership narrows in on the U.K. market, which has for some time been considered the biggest ‘Internet-based economy’.

In conclusion, I believe that AT&T is a good buy. Although aggression from Verizon seemingly passes as a threat, I contend that AT&T’s stock offers more comfort. Its alluring yield of above 5 percent, coupled with a track record of strong dividend growth, acts as bait. AT&T is a good buy, both for the income oriented investor and the growth oriented investor.

 


muhammadbazil has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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