Nokia's Fate Still Hangs in the Balance
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Finnish mobile phone manufacturer Nokia (NYSE: NOK) is alive and kicking. Its stock recently enjoyed the biggest one day gain it has seen since 2008, rebounding sharply from a 16-year low. The reason? Sales of flagship smartphone Lumia exceeded analysts' expectations for the second quarter of 2012. Sales increased to 4 million units, doubling the first quarter's 2 million units. In addition, the company's cash burn rate in the quarter slowed to 4.2 billion euros from a burn rate of 4.9 billion euros the previous quarter.
Buyers of the stock took these two news items to mean that Nokia is making progress in its plan to reverse revenue and smartphone market share declines. The company has been steadily losing market share to Samsung – which uses the Android operating system from Google (NASDAQ: GOOG) – and Apple (NASDAQ: AAPL). According to research firm Gartner, Android and Apple devices now dominate the smartphone market with an 80 percent market share.
In 2012, Samsung supplanted Nokia as the world's biggest seller of smartphones. Meanwhile, in the first two quarters of 2012 Apple sold more than 72 million iPhones. That recently led Piper Jaffrey analyst Gene Munster to state that he sees Apple rising from “the low 20% range” of all smartphone market share to perhaps “the low 30% range by 2015”.
But what about Nokia? Things are not rosy for the company yet. Its net loss for the latest quarter came in at 1.5 billion euros and overall smartphone sales numbers still dropped 40 percent from year ago levels due to a steep drop in the number of Symbian (its old operating system) phones sold. As most investors know, its Lumia line is the first smartphone based on Windows from Microsoft (NASDAQ: MSFT).
Nokia is fighting hard to gain market share for its current Lumia 900 phone in the key U.S. market. It recently cut the price of the Lumia aggressively from $99 to $49 on a two-year contract through AT&T. The phone runs on AT&T's rapidly growing LTE network. Nokia needed to do this to attract customers in the U.S. who may be discouraged to buy the phone because it will not be able to run Microsoft's new operating system coming this fall, Windows 8.
Even if sales of phones based on the older version do taper off in the United States, look for Nokia to aggressively push these phones in the emerging markets as part of a segmentation strategy. The company's CEO Stephen Elop said, “You can achieve lower price points and do things [around] that.” Samsung, which has been pressing Nokia hard in emerging markets and taking market share, had better be on its guard. Nokia knows its way around emerging markets.
However, despite all the better-than-expected news from Nokia in its latest earnings report, the company's future fate is pretty much reliant on one thing...the success of Windows 8 smartphones, which are due to launch in October.
One good sign is that Nokia management is thinking outside the box. In Europe, the company may tear up its traditional marketing strategy and offer European operators an exclusive opportunity to launch a Windows 8 smartphone. This is similar to the strategy it used in the U.S. with the Lumia launch by AT&T.
Many in the industry believe the Windows 8 operating system for smartphones will be big, bringing the capabilities of phones running on it at least up to par with Android, if not surpassing it. It may be Nokia's last roll of the dice if it is not successful, as Moody's recent two-notch downgrade of its debt into junk territory indicates.
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