In a world of smartphones dominated by Apple (AAPL: Charts, News) and adopters of Google’s (GOOG: Charts, News) Android OS, it’s becoming increasingly easy to forget about the largest handset maker in the world, Nokia (NOK: Charts, News), which has been attempting to right itself out of a year-long tailspin. Currently, Google Android handsets comprise 50% of the smartphone market, while Apple has claimed approximately 15-20%. That doesn’t leave much wiggle room for the world’s leading manufacturer of regular dumb phones to make an entrance. Nokia’s previous smartphone efforts have fallen flat, and the company’s choice to bet the farm on Microsoft’s (MSFT: Charts, News) Windows Phones has alienated many customers and investors, especially considering that Microsoft owns an anemic 2% sliver of the smartphone market. Nokia is also confusing current customers with its own Symbian system, which still outsells its Windows-based phones 1o to 1.
In October, Nokia finally unveiled its long-awaited Windows smartphone, the Lumia 800, which has attracted few customers despite solid, positive reviews from critics. Only 2% of Europeans in the market for a smartphone stated that they would purchase it instead of an iPhone and Google Android phone. Investors weren’t impressed by the Lumia 800, and shares have plunged 20% since its debut. Analysts believe that the smartphone industry will “consolidate quickly” and that Nokia’s limited choices have little chance to dent Apple’s iPhone or Google’s Android handset in time. However, Microsoft is working hard to keep the Lumia and its Windows Phones peers relevant – this week, Microsoft unveiled the Nokia-exclusive section of the Windows Mobile Marketplace, and has hinted at industry-changing “superphones” for Nokia in late 2012. Microsoft defines “superphones” as cutting edge smartphones with high definition screens, multi-core ARM A15 architecture processors, as well as full 4G support.
CEO Stephen Elop, who has been criticized for his ties with his former employer, Microsoft, warned of lower sales and earnings for the rest of fiscal 2011 back in May. Shares crashed after the announcement, several key Finnish executives resigned, and the company has been in spinning out of control ever since. However, the drama has since subsided, and investors can now objectively analyze Nokia’s strengths and weaknesses.
While Nokia stands to gain from increasing the Windows standard across all its smartphones, in the short term it will incur additional pain as it continues selling its declining Symbian-based phones, which are ironically being cannibalized by its Microsoft-powered peers. Nokia argues that Symbian remains a leading platform in several emerging markets, including China, India, Russia and Turkey, and has promised to keep supporting it through 2016, but has also acknowledged that Windows Mobile will be Nokia’s primary smartphone platform in other markets.
For optimists, the Lumia is a small, positive baby step in the right direction, which could help Nokia keep a “place at the table”. Swedbank analyst Jari Honko stated, “With current and upcoming models, Nokia can win back market share in both feature phones and smartphones.” Honko adds, on a bullish note, “Today’s share price does not take into account any recovery in the Nokia market position.” In addition, other analysts believe that investors should realize that Microsoft’s upcoming Windows 8 could be a potential game changer, unifying tablets, smartphones and personal computers across a single platform.
Nokia’s current stock price under $5 has attracted value investors, many of whom are hoping for a buyout offer of the struggling brand. However, even at these bargain basement prices, the trailing P/E remains around 21, which signifies that shares aren’t particularly undervalued. The company finished last quarter with 1.36 euros per share of cash, and an additional euro per share of value from its patent portfolio. Rumors of a full Microsoft takeover have persisted since Elop took the helm, and have intensified with Nokia’s concentration on a line of Windows Phones. In addition, Nokia’s rich patent portfolio, as well as its ownership of digital mapping firm Navteq and mobile network gear manufacturer Nokia Siemens Networks, can prove to be value enough for Microsoft, which would need additional patents and technologies to maintain an edge against its patent hoarding competitors, Apple and Google. Investors should keep a close eye on Nokia’s earnings next year for hints of improvement or further weakness, as the company’s future is still up in the air for 2012, with bulls and bears anxiously waiting to pounce.
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