This Smartphone Manufacturer Has a Big Upside

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

In a previous article I recommended that investors buy Nokia (NYSE: NOK) and maintained that even if we discount the devices segment, the company was still worth $5 per share.

Yesterday, the smartphone giant pre-announced its 4th quarter results and surprised the market with good Lumia sales and profitability in its devices segment. I believe Nokia’s bullish run will continue and the stock will at least cross $5. The earnings announcement will further improve the stock price and investors should get in before it’s too late.

History

Not long ago, Nokia was the leading cell-phone manufacturer in the world. The company was far ahead of its industry and catered to all, both high- and low-end consumers. The fortunes of Nokia and its shareholders were turned on their head due to a single strategic mistake. The company refused to board the Android train and persisted with its Symbian OS. The growth of the Android was unprecedented, and the rest is history.

For a while Nokia seemed to be heading for doom, with its stock losing 95% of its value and its credit rated "Junk." It was saved from the edge by none other than Microsoft (NASDAQ: MSFT). The company offered both financial and technical assistance to Nokia, and, in return, Nokia scrapped its Symbian operating system and adopted the Windows Phone OS. Nokia officially launched the Lumia series with the Windows OS last month and immediately got worldwide appreciation for the hardware.

The initial sale of the Lumia were not exceptional but were still enough to warrant an upgrade of the OS. Microsoft released its new WP8 at the end of October, and, subsequently, Lumia devices with WP8 were launched. Therefore, last quarter results hold great significance for Nokia because they will give a peak into the success of WP8 and of Lumia.

The pre-announcement    

Yesterday Nokia preannounced the results for its 4Q2012. Since the announcement, the stock has appreciated approximately 18%, and it seems will keep going higher. There were a number of positives from the quarter.

Lumia sales were 4.4 million for the quarter. Although this figure seems small, considering it's not even 10% of the total iPhones Apple (NASDAQ: AAPL) is expected to sell this quarter, it is still much higher than Street estimates. It becomes even better if we consider that the Lumia WP8 has been on the market for less than 2 months and is still not available in most markets.

According to the company, the devices and services segment is finally becoming profitable. This has a lot to do with the restructuring program Nokia has been implementing for the last few quarters. The success of this program will improve cash flows, which will be reported in detailed earnings, and the stock will move further upwards. The negative cash flows have been a key concern for the investors due to the terrible credit rating of Nokia.

NSN (Nokia Siemens Network) kept up its excellent performance and will be reporting record profits for the fourth quarter. The company expects the current quarter (1Q2013) to be a weak one for NSN due to seasonality.

Bottom-line

In my previous article, I gave detailed valuations for Nokia and maintained that the stock was extremely cheap. I gave a $5 target for Nokia which included cash, patents, and NSN. I completely discounted the device and services segment and maintained that success of WP8 can bring this segment to profitability.

Preliminary results indicate that Lumia has been able to penetrate the seemingly impenetrable market of Android and Apple. I believe these results should create more concern for Apple investors, as the Lumia 920 competes directly with iPhone 5.

Even at these levels, Nokia remains a strong buy and the stock will appreciate further after results are announced. Microsoft investors should also rejoice because this preannouncement indicates that WP8 has been able to gain some traction and, based on this, good things can also be expected from Windows 8. 


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