Those of you who, like me, were using a cell phone in the early 2000’s, must have heard of Nokia. It was the undisputed number one brand for mobile device manufacturing. A decade later, when our world is filled with smartphones and iPad-type of tablets, Nokia seems to have vanished from the phone stores, especially in the US. Well, the company’s stock price has plunged just about as fast: it lost 90% of value in the last 5 years following the launch of the legendary Apple iPhone. So what has been going on with Nokia? Does their stock make for a good investment at this moment? My answer is yes.
The sad tale of Nokia’s downturn is another example of a great company that wasn’t able to keep up with new trends in the industry. The most famous victim of this phenomenon is Kodak, the film-making company that went from having 100,000 employees worldwide to bankruptcy. While Kodak failed to predict the future of digital imaging, Nokia refused to admit the rise of new, more advanced, operating systems. Nokia’s old mobile operating system Symbian was soon left behind in the competition against Apple’s iOS and Google’s Android between 2007 and 2010. The lucrative smartphone market very quickly saw the shift in market share from Nokia to Apple and Samsung, and the Finnish giant soon saw their dominance eroded almost to the point of no recovery.
As a punishment for the slow adaptation to the new smartphone market conditions, Nokia’s CEO Kallasvuo was fired, replaced by Stephen Elop, who was the head of the business strategies division of Microsoft. This started a new chapter for Nokia as a mobile device maker.
Instead of trying to revive the once-successful Symbian, Elop instead decided to sink the ship and built their new smartphones around the fledgling, unproven Windows Phone platform. Nokia named this new line of smartphones Lumia. The announcement was made in November 2010.
Fast forward to 2 and a half years later, today, let’s look at how much the Lumia line of devices has helped Nokia turn the table around.
According to data from Gartner, Inc., a technology research and advisory company, as of Q1 2013, Nokia had about 3% of worldwide smartphone sales market share, compared to 20% as of Q1 2012 and 25% as of Q1 2011. And yet, just about every Lumia device released was a hit; the Lumia 920, the latest flagship, was reportedly sold out in the first few hours of release. What is going on here?
Well, first of all, Nokia’s decline in smartphone market share was inevitable when they decided to terminate the struggling Symbian operating system. Nokia essentially started from scratch with the new operating system Windows Phone. But seriously, 3% market share after 1.5 years of brand development? The first Lumia was introduced in November 2011. How could the 2 giants in software and hardware, Microsoft and Nokia, let this happen? And ironically, their products were sold out….
As it turns out, Nokia’s biggest problem was that it could not produce enough devices to satisfy demand. Sometimes being sold out is a bad thing. You sell fewer units than you would have, and perhaps more critically, you disappoint potential customers. If you spark curiosity in a customer just to let him know that you’ll not be able to provide the advertised product, the customer will not come back. In a time when Nokia is slowly rebuilding its brand, this is a sign of trouble.
The device that was the most sold out was the Lumia 920, the flagship of Nokia, carrying the highest specifications, offering the most functions, and running on the latest Windows Phone 8. I bought myself one around Thanksgiving, and I love it. The device runs extremely fast and smoothly, and provides very useful Nokia apps and services. The only real drawback is the lack of apps in the Windows Store, which is not the end of the world given Windows Phone’s relatively young age. I wasn’t exactly surprised to learn that it was voted the best smartphone of 2012 by Engadget.
Unfortunately, the competitive Lumia 920 soon became unavailable. Nobody at this point knows exactly why Nokia could not meet demand. It has been suggested that Nokia was on the conservative side in sale forecasting. Some believe that Nokia did not have the cash to prepare a huge inventory. Yet others say Nokia had become such an insignificant player that their manufacturing partners did not give their orders high priority. Whatever reason, what is done is done. Of course, the excitement for the Lumia 920 eventually abated, and the lost sales were never recovered. Missing the wave in early January, Nokia ended the quarter with disappointing results.
Following the launch of the hugely successful high-end Lumia 920 and the mid-range Lumia 720, Nokia introduced in February 2013 two other Lumia devices to fill the price spectrum: the Lumia 820, and the Lumia 520. The Lumia 520 is a very interesting device.
I want to digress for a minute to explain why it was necessary for Lumia to release the low-end Lumia 520 following the flagship Lumia 920.
Windows Phone 8 is a very powerful and efficient mobile operating system: even a mobile handset with seemingly weak specs can run smoothly on this platform. The only major weakness it has is the availability of apps. The Windows Store is so small relative to the App Store of iOS because many app developers aren’t convinced about the potential of Windows Phone. They write apps to make a living; without many users they will not make a profit. Therefore it is critical that Microsoft and Nokia expand the Windows Phone user base to encourage app developers to make a shift to this new platform. They need quantity.
At this point in time, 6 years after the launch of the iPhone, the smartphone market is almost saturated in the highest stratum: those that can afford the high end devices have already bought them. The Samsung Galaxies and Apple iPhones are totally dominating this market segment, and competing head to head against them is not going to be useful.
The situation is the opposite in the lower strata of the smartphone market: grandmas are sticking with their 10-year-old feature phones because they don’t want to pay 600 bucks for a new phone. Broke college students aren’t paying that, either. And neither are most people in developing countries, where Nokia is still maintaining a firm stronghold. The new battlefield between cell phone manufacturers is in the low-end market segment.
Capturing these essentials, Nokia very clearly targeted the lower-end users with the low-end Lumia 520. Well, low-end is not really a correct label for this phone. Windows Phone 8 is very resource-sufficient, and runs smoothly even on the Lumia 520. Consumers that want to experience Windows Phone 8 but can’t afford the $600 Lumia 920 and instead opt for the Lumia 520 without missing much; most Nokia services are available, and the experience is about as smooth. This is not your typical low-end mobile device that lacks features and lags on heavy use. This feature-rich, budget-friendly phone goes for only $200.
The Lumia 520 has proved to be a worldwide success. It has sold out in most developing countries. In my home country Vietnam, you’d need to order and wait at least 1-2 days at most stores. Phone stores in China and India have been in and out of stock for days at a time.
In late April, Nokia introduced the Lumia 521, a variant of the 520, to the American market. The Lumia 521 is locked to T-Mobile and sold without a contract. And the price is unprecedented: $150 on Home Shopping Network website, and $130 at Walmart. For less than $200, no smartphone can beat the Lumia 520/521 in performance. And yet the Lumia 521 in America goes for even less than its sibling Lumia 520 costs in developing markets.
Obviously the Lumia 521 sold out everywhere. Yes, even at the giant retailer Walmart. There were times when all HSN, Walmart, and T-Mobile store online were out of stock. Recently HSN and T-Mobile have replenished their supplies, but Walmart stores are still mostly sold out of this device. I’ve been following Walmart availability, and noticed that online availability usually lasted for no more than a few hours at a time. I challenge you to find a second commodity at Walmart that behaves like that.
The Lumia 520/521 is a critical success. Users have rated the phone 4 or 5 stars at every single online store. Most online reviews are extremely favorable. It is one of a kind.
What does the success with the Lumia 520/521 mean for Nokia? First of all, the Windows Phone 8 platform should gain significant market share in Q2 2013, which is great news for the Windows Store. Second of all, Nokia still has not resolved the supply issue. Letting a popular device be out of stock for a month and a half is not a proper way of attracting customers when it is market share that you’re going after.
The second quarter of 2013 is coming to an end. We will find out in the next several weeks how well Nokia is doing this quarter. The Windows Phone project is coming to maturity, and the current quarter may be the linchpin to the success or failure of the project. If the figures are positive, then the turnaround will likely be very successful: Nokia was once a giant, and gaining back even half of that glory will still be a miraculous improvement from the current state.
On the other hand, negative figures will indicate failure. Nokia investors have been holding out for a turnaround, and are losing patience over the Windows Phone projects. Another unsuccessful quarter and Stephen Elop may not hold his chair. Nokia will likely not be able to endure another restructure: by then their market share and brand recognition will have been so severely eroded that the D&S division will never recover.
Amid a restructure, Nokia stock is quite volatile. The price movement following the earnings report for Q2 will be dramatic, and in my opinion, the direction will be upward. Following the Q1 earnings announcement, Nokia also issued a “guidance”, or prediction for the performance in the next quarter. The degree of success of the Lumia 520/521 was probably not accounted for in the guidance, or Nokia would not have run out of stock for this budget device everywhere. Even a supply issue would not have caused this alone: Nokia clearly intended this phone to be a quantity product, hitting most major markets worldwide at the same time. They must have prepared some abundant inventory but still run out of stock. So I predict that Lumia sales will be a positive surprise, resulting in earnings results that exceed guidance.
And if that happens, investors will flock to Nokia stock (NOK), and the stock price will quickly rise. This may be the last chance to grab Nokia shares for cheap. I made sure to hold some.
NOK is my favorite stock. If you are interested in stock picking, you can expect to see more about Nokia from me in the near future.
Best,
Richard (Hiep Tran)
Hiep's Finance 