Is Nokia Down or Bound to Turnaround?

I recommended Nokia (NYSE: NOK) as a solid buy a month ago – in the time since then it is down 25%.  Am I backing out on that recommendation?  Definitely not.  The stock has been down mainly due to last quarter’s earnings reports as they landed below the estimates.  Does this mean the company is fundamentally weaker than it was a month ago?  I don’t think so.  Nokia knew that its lineup of phones was falling behind other companies: Apple (NASDAQ:AAPL) and then Motorola (NYSE: MMI) and the rest of the Android Gang on the high end, and Chinese mass produced dumbphones on the lower end.  They knew that their margins were falling and their profit was dropping with it.  That is old news – but it is only now that Wall Street is reacting fully to it. I would not recommend investing in this stock if that was still the case but the company is changing course.  Now we have that cleared up, why it is that I recommended Nokia in the first place?

I had three main points in my previous article and here they are summarized.  The company is huge and still the worldwide leader in market share.  As such, they have a massive base of experience and personnel to draw on and distribution networks all over the globe.  They have recently announced that they’ve gone all in with Microsoft on the new Windows Phone and Microsoft (NASDAQ: MSFT) has said that they have a special relationship with Nokia.  CEO Stephen Elop has already initiated a number of measures to revive the company and make it a leaner operation focusing on their core operations as a handset maker.  As proof they ditched Symbian and have cut costs by automating more jobs and moving the rest to Asia.  As a kicker and something I didn’t mention explicitly in my previous article Nokia has $4.02 in cash per share.  In case you haven’t already checked the stock is worth $4.07 as of this morning… you can get the massive corporation of Nokia with a number of great phones in the pipeline for $.07?  Count me in.

So that’s why I recommended the company a month ago.  Now let’s see what has changed.  The Q1 stats came out and revenue was down 35%.  This knocked down the stock but is this really such a surprise?  Who wants to buy a Symbian phone when Nokia said they are ending the OS?  But of course the emotional and sometimes irrational Wall Street is going to bring the stock price down and this seems to me like a great time to buy in.  The new products and organizational changes won’t affect the bottom line for another 3-6 months.  Now admittedly there were a few slip ups.  Nokia released their prized new Windows Phone, the Lumia 900, on Easter Sunday (not sure who decided that) and then there was a slight bug in the operating system but that was fixed within two days and all users affected by it got full refunds.  So while everyone is downgrading Nokia on news that should have been predictable let’s look at what is going right.

Amazon.com keeps a list of best selling smart phones with plans on their website and the Lumia has been on top since the day it was released.  Check out the reviews for a taste of what customers are saying, the average is 5 star as of 4/17/11.  But Amazon isn’t the main source of the Lumia 900, their main seller is AT&T who has an exclusive contract with Nokia to sell the phone.  And AT&T plans to make the most of this exclusivity.  They announced that they will push the Lumia with more advertising dollars than they spent on the iPhone and add this to the marketing that Nokia itself is putting behind the device and you have a powerful combination.  The success isn’t the only positive the phone is bringing to the company; beyond just increasing Nokia’s revenue it is boosting the profit margin itself as they are making much more per phone with the Lumia series than they did with Symbian or their feature phones.  As they release more top of the line smart phones the company will come back into the limelight and their net income will likely buck its recent downward trend.  In case you haven’t been following the company they have a low price point tablet in the works and will be one of the first companies to release phones and tablets on Windows 8, Microsoft’s bid into the world of mobile operating systems.

The company isn’t quite in the clear yet.  They have had success with the Lumia 900 but that success has not been astounding by any means.  So the verdict is still out but with a solid contender for a number three spot in the smartphone market, more phones in the pipeline, a huge supporter in Microsoft, and even a bargain priced tablet, Nokia has lots of potential to improve its position and thus I am long on the stock.  Now with all of that said the stock may still go down but historically it has been rare that a stock will go much below their cash per share and Nokia is right at that level.  So I encourage you to go out to your local AT&T, check out the phones, read the reviews, and come a Foolish decision!

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