It’s Time To Get Your Hands On This Stock, Once Again!

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

The recent years have spelled out a typical riches-to-rags story for Finnish smartphone maker Nokia (NYSE: NOK) and they have nothing but their own complacency to blame. The company missed two major market trends by ignoring the demand for clamshell phones and then following it up with its disastrous decision to sidestep the consumers’ newfound love for touch screen devices. The latter blunder proved to be the proverbial nail in the coffin, and led to the rise of the current market leaders Apple (NASDAQ: AAPL) and Samsung. The result – Apple’s iOS, along with Google’s Android software that powers rival Samsung’s phones, together control about 91% of the worldwide smartphone market today. Nokia’s market share in the fourth quarter is an embarrassing 3%, according to data from research firm IDC.

In fact, when you look at the broad picture, this company has had to start almost from scratch, chalking out a slow and painful path to a recovery that often seems elusive. At the same time, I feel its bold decision to partner with Microsoft leading to the use of the latter’s Windows operating software on its smartphones, has been a good one after all. The way I see it, running Windows software on its Lumia range of phones has helped Nokia come out of its ‘frozen in time’ imagery in the eyes of customers – a fallout of its long use of the Symbian operating system.

And now, there are a number of factors as well as potential areas of growth that together should definitely bring back the smile in the faces of potential investors. Here’s a lowdown of what’s working and what should work in Nokia’s favor in the near term.

Smart, early bet on emerging markets

Everyone who follows the tech world knows these days that the US and other developed markets are slowly nearing saturation, as far as the smartphone industry is concerned. That’s why every player worth its salt knows that emerging markets are going to be the next big destinations. Nokia has been smart enough to make an early move in this direction, in two of the biggest emerging markets of today, India and China.

A dominant role in India

Always considered to be a traditionally strong market for Nokia, India has, of late, come up real fast in the smartphone market hierarchy. The country’s overall handset sales recorded a sharp 20.8% growth, out of which feature phones dominated the show with a robust 19.9% year-on-year growth rate as on 2012, as per a recent study. The best part, however, is that Nokia remains the market leader both in terms of overall as well as feature phone-related sales, with Samsung following in second place. In fact, Nokia’s ‘Asha’ range of sub-$100 phones have performed exceedingly well in India in terms of sales, and the company is now intelligently looking at replicating the success for its newly introduced Lumia 520 smartphones priced at an equivalent of around $200 in the country.

A headstart in China

Coming down to China, its importance need not be emphasized now that it has overtaken the US as the world’s largest smartphone market. And this is again where Nokia has derived a headstart over its biggest rival Apple by successfully tying up with China Mobile, the country’s and also the world’s largest wireless carrier. Nokia struck a deal with China Mobile towards the end of last year, upon which the latter agreed to feature the Lumia range of phones in its service plans. The fact that China Mobile is actively ramping up its 4G network infrastructure should also be good news for sales of Nokia’s high-end Lumias, most of which are 4G enabled. At the same time, Nokia needs to be really careful with the pricing part, as Chinese consumers are known to be very price-sensitive.

On the other hand, despite many years of talks between both sides, Apple has still been unable to strike a deal with China Mobile that would enable the latter to include the iPhone among its service plans. While revenue sharing arrangements have remained a long term sore point, China Mobile’s network is also based on an obscure TD-SCDMA technology, which the current generation of iPhones is not compatible with. While their collaboration seems to be inevitable, given the profit potential involved, for now Apple’s loss is very much Nokia’s gain.

Not doing badly in developed markets either

Although there is a wide gap as far as Apple and Google’s Android platforms are concerned, it seems Nokia’s gamble in siding with Microsoft’s Windows software is proving to be a smart move in the crucial US market. A very recent survey conducted by Kantar Worldpanel reveals that while Android and Apple’s iOS account for 51.2% and 43.5% of the country’s smartphone sales, respectively, the big surprise is that the share of Windows-based phones has actually gone up to 4.1% from 2.7% the previous year. That seems respectable, especially when you compare it to fellow competitor Blackberry (NASDAQ: BBRY), whose market share seems to have dwindled to an embarrassing 0.7%. Incidentally, the Windows platform share has also gone up in other developed markets such as the UK, Italy and Germany. And by the way, everyone’s aware that Nokia manufactures more than 80% of Windows-based handsets at present. Way to go Nokia!

Blackberry’s recent release of the Z10 handset, based on the company’s much-touted BB10 operating system, seems to have met with a frosty reception from carriers like AT&T, if recent reports are to be believed. On the other hand, the company’s excessively high pricing of the phone in emerging markets such as India have not gone down too well with its customers in that region. And even if Indonesia proves to be a bright spot, that’s too miniscule a market to consider.

The Nokia Siemens factor

One of the biggest strengths of Nokia lies in the increasing profitability of the Nokia Siemens Networks joint venture. The wireless-network venture has turned profitable in recent years, providing the much-needed balance to Nokia’s sliding handset business. Having recorded an operating profit during the fourth quarter, this venture made up for a significant 46% of company sales in the previous year. Now that Nokia and Siemens are due to take a decision as to how to proceed in future, the former would do well to make an all-out attempt to acquire the Siemens side of the business. Nokia needs this crucial bit of support in difficult times like these.

The race to win over the enterprise market

Every smartphone maker these days knows that it’s the corporate customer segment that generates the real business, as companies tend to buy handsets in bulk. Till some time back, Blackberry was the undisputed favorite of corporate customers, but the scenario has changed rapidly. In fact, the company’s subscriber base has gone down as revealed by its latest quarterly results. The steady rise of the Bring Your Own Device (BYOD) trend has resulted in more and more companies adopting the iPhone and other Android handsets.

Nokia stands a very good chance of securing a chunk of erstwhile Blackberry enterprise customers and is, in fact, already aiming in this direction, as outlined by its CEO. The company has a golden opportunity to leverage the customer relationships built up by Windows software maker Microsoft over the years. At the same time, enterprise IT departments should find it easy and affordable to synchronize Nokia’s smartphones with workplace computers, most of which run a version of Windows, still the world’s favorite computing software. The phones are also available in a wide range of prices, unlike Blackberry’s only offering till now – the Z10.

A lot of reasons to smile

As I had said at the beginning, this company does seem to be inspiring confidence day by day. I would keep an eye open for the next quarterly results, which should show how the Lumias have fared in China or what has been the impact of Lumia 520 sales in markets like India. While some of you may say that its foolishness on Nokia’s part not to get into the tablet scenario, the fact remains that it needs to be careful not to clash with Microsoft which has its own set of tablet products. Microsoft is also helping Nokia in its own way and the former’s smart moves like installing the Yandex search engine on Windows phones in Russia have led to strong sales in the Eastern European region. Yes, it’s still miles to go for Nokia, but at least the path it’s following seems to be the right one. I have a good feeling about this company’s prospects and this just may be a good time to acquire more of this stock. 

Subhadeep Ghose 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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