Does Nokia Have Room to Run?


While I am extremely hesitant to buy a stock that has popped by roughly 19% on a positive news catalyst, Nokia and its current explosion upward may be an exception. The company announced yesterday that it had sold 4.4 million of its Microsoft Windows-Phone-based Lumia smartphones and that overall operating results had exceeded expectations. Some analysts have digested the news and concluded that the company looks well positioned to be profitable throughout 2013 through both increased revenue and improving cost controls. As more and more consumers begin to consider the Windows ecosystem a viable option, it is likely that pure inertia will allow the company to continue to improve results. The stock traded up strongly Friday morning and looks able to continue to run from here.

Operating results
The company preannounced Q4 earnings yesterday, sparking a big move in the stock based on the better-than-expected results. CEO Stephen Elop said that "solid execution against our strategy enabled us to exceed expectations." The company expected to have achieved underlying profitability for the quarter that it will carry into this year. In addition to strong sales figures, the company is beginning to see results from the cost-cutting measures that it has put into place. The two factors provide a solid balance for the company that has severely struggled in recent years.

Overall, the company sold 15.9 smartphones, with 9.3 million being of the full touchscreen variety. While 2.2 million were Symbian-based units, the surge in sales of the Lumia is one of the brightest spots to take away from the release. Elop said, "We are pleased that Q4 2012 was a solid quarter where we exceeded expectations and delivered underlying profitability in devices & services and record underlying profitability in Nokia Siemens Networks. We focused on our priorities and as a result we sold a total of 14 million Asha smartphones and Lumia smartphones while managing our costs efficiently, and Nokia Siemens Networks delivered yet another very good quarter."

Making inroads
While the first sign that Nokia was resurrecting itself from the ashes of its old self was the announcement that the company had landed a highly coveted relationship with China Mobile, the above is some of the first real data that supports the contention that Nokia is growing. By operating system, IDC has reported that as of 2012 where Google's Android commanded 68.3% of the market and Apple's iOS had 18.8%, Windows only accounted for 2.6%. The same report projected that Windows-based smartphones would have swelled to 11.1% market share by 2016; these sales figures lend some credence to that claim and even suggest that Nokia and Microsoft may exceed that expectation.

Other considerations
While not directly tied to Nokia or the smartphone game, a recent positive review by The New York Times' David Pogue of the highly anticipated Surface Pro tablet-PC hybrid may be beneficial to the adoption of Windows as a viable smartphone alternative. Compatibility has always been a major concern of consumers, and the ability to easily link between a Windows phone and a Windows tablet like the Surface Pro should be beneficial. Furthermore, the reality is that the more positive press that Microsoft-based devices receive, the better it will be for all of these devices in general. This is the type of catalytic event that can lead to a consumer considering a Nokia Lumia 920, which may be enough to change his or her purchase decision.

The inertia of opinion
I believe that one of the biggest obstacles that Nokia and Microsoft have faced is their ability to be even included in the conversation. When most of us think about smartphones, we think Android or iPhone. While Windows phones have carved out a small niche to date, unless consumers are honestly comparing them, it is hard to imagine that these devices can grow their relevance. Events like the China Mobile win, positive reviews for other Microsoft devices, and positive news for Nokia are the types of catalysts that can bring these names back to consideration. Without this element, even if these devices are competitive in terms of functionality, they will be hard-pressed to capture market share.

Personal electronics are among the most trend-following products on the market today. Functionality is important, but the perception you create with your phone counts, too. In this sense, if Windows phones can gave even a small trend following group of loyal users, it may be able to push deeper into the market. Based on these positive results and the progress the company is making -- both in terms of operations and perception -- despite the recent pop, Nokia remains a buy.

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