Over the course of 2011, investors steadily unloaded their
Research in Motion (Nasdaq:
as it became apparent that the maker of Blackberry phones couldn't
keep up with the tag-team onslaught of
, which now collectively control more than 75% of the global
Perhaps an even greater victim of the Apple/Google juggernaut has
, which should have been an important player in the smartphone
About two months ago,
that the Finland-based company was headed for trouble.
of Nokia remain stuck below $6 and a very high short-selling
interest implies more trouble ahead. The recent short position
stood at 148 million shares, equating to six days' worth of trading
and the second-largest short position on the New York Stock
Bank of America (NYSE:
But I'm now seeing this stock in a different light. Though it's a
bit too soon for Nokia to declare victory, the last few months have
altered the investment thesis. Shares are likely to hold their own
in 2012 -- or stage a powerful rebound.
A desperate gambit pays off
Like Research in Motion and
, Nokia found that its operating system (known as Symbian) simply
couldn't keep up with the outstanding software and marketing muscle
that Apple and Google developed. Management realized it was too
late in the game to truly resuscitate Symbian, so it decided to
cast its lot with
, which was readying a new mobile software platform, known as
A few months ago, I suggested that Microsoft's efforts to crack the
mobile software market had repeatedly failed, and this time would
be no different. Since then, technology reviewers continue to laud
Microsoft, predicting that the current Windows 7 efforts were
yielding a much more competitive
. Equally important, Nokia's hardware strategy is beginning to look
like a winner, and the combined efforts of these two firms should
attract considerably more buzz in coming quarters.
Nokia has begun to release a range of new smartphones called Lumia,
which target the low-, middle- and high-end of the market. That's a
wise move for a company with a longstanding presence in
and a still-considerable presence in more advanced markets in
The Wall Street Journal's
had generally kind things to say
about a new low-end offering.)
This should help retain or build
in emerging markets and at the low-end of the U.S. and European
margins are likely to be thin for such a low-cost device.
Yet it's the upcoming launch of pricier Lumia phones that may
really captivate investor interest. There are several reasons to
think Nokia may have a winner on its hands, including:
• Microsoft is expected to spend millions of
dollars in a number of countries to tout the new hardware/software
combination, creating a high degree of visibility for consumers.
Microsoft's dominant share of server and business software has
created anti-trust headaches, though the company has no such
concern in the mobile software market and is expected to tackle
that market opportunity in a way we haven't seen the software giant
• Wireless service providers are likely to
aggressively support Lumia, as they are increasingly wary of the
control that Apple and Google have over them.
• Nokia's expertise at low-cost manufacturing
should enable the company to slightly undercut Android and
Apple-based phones while retaining decent profit margins.
You can see the Lumia roadmap start to unfold in coming weeks and
months. Later this quarter, major European wireless carriers such
Telecom Italia (NYSE:
and 02 are all expected to roll out Lumia phones. It is also
notable that these carriers also have a significant presence in the
Caribbean, Latin America, Africa and Asia. T-Mobile and
will be pushing Lumia in the United States, (and
will presumably follow suit, though I can't confirm this).
This isn't to suggest that Lumia will be a home run and Nokia will
steal major market share from Google and Apple. Instead, the odds
that Nokia will keep losing market share have changed. It's best to
assume that Lumia gains decent, but not major, traction in the
Yet even with such modest assumptions, this stock would still find
new appeal. Shares of Nokia appear fairly valued at around 15-20
times projected 2012 profits. Yet with decent traction, Nokia's
profits could spike much higher in 2013. Investment firm FBR sees
per share rising from around $0.40 in 2012 to $0.85 in 2013. If
their forecast is correct, then shares look quite cheap at just six
times forward profits.
Risks to Consider:
Nokia's telecom infrastructure business, which is run in a
joint venture with
, faces myriad competitive pressures and could create a drag on
profits if that unit loses market share. Stay tuned to chatter
about this part of the business if you consider buying shares.
Action to Take -->
It's a bit early to declare Nokia's new strategy a success. But
it's also increasingly clear that this company isn't headed for
failure as I and others concluded last year. At current prices, the
risk appears greatly diminished while the upside case is starting
to take shape. This means short-sellers are unlikely to profit
(perhaps creating a major
For investors looking at Nokia for upside, this is a great time to
do your homework. If the Lumia phones continue to receive solid
praise and wireless carriers start to speak of solid initial demand
later this quarter, then the Wall Street herd is likely to pivot
back into bullishness. If this happens, then shares could work
their way toward the $10 mark, implying more than 60% upside.
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-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of GOOG, T in one or more if its "real money"