Earnings Boost Nokia, But Windows Phone Release Next Week Could Drive Stock Higher
Nokia’s (NYSE:NOK) stock was up 6% yesterday after the company announced better than expected results. The company got a boost from higher than expected sales of its low-end phones, especially the dual-sim phones that we think will help drive penetration in emerging markets. However, the company continues to struggle in the smartphone market and is unable to fight off challenges posed by Apple’s (NASDAQ:AAPL) iPhone and Google’s (NASDAQ:GOOG) Android based smartphones. We believe its partnership with Microsoft (NASDAQ:MSFT) could prove crucial to its turnaround as it unveils new smartphones based on Windows Phone 7 operating system starting next week.
Our revised $7 price estimate for Nokia’s stock is about 5% above market price.
See our complete analysis for Nokia stock here
Dual-Sim Phone Sales Helped Nokia
Dual-sim phones are quite popular in emerging markets and though the company was late in coming out with these phones, it seems that the company has recovered nicely. A few days back, we wrote a note titled Nokia’s Dual SIM Phones Could Help Add Some Life to Shares in which we analyzed how dual-sim phones could boost Nokia, which is exactly what happened.
Nokia Still Has a Lot to Cover Up
Although Nokia was able to sell more low-end mobile phones last quarter, the issue is that these are not adding much value as these phones are dilutive to its margins. The company should be looking to sell more number of smartphones to boost its margins. Unfortunately, Nokia’s presence in the smartphone market continues to decline and in the last quarter it could sell only 17 million smartphones, a decline of 38% when compared with Q3 2010 quarter. [1]
The gross margins in the smartphone category also declined from 30% to 23% during the same period, which means Nokia is still not able to address key issues. We believe the stock got a temporary boost as investors got excited by better than expected sales for its low-end phones, but the reality is that the struggles for Nokia continues in the more important smartphone segment.
Real Test for Nokia Begins Now
We believe the real test for Nokia will begin soon as it is in the process of completing its migration of Symbian operating system to Microsoft’s Windows Phone 7 platform for its smartphones. Nokia is expected to introduce its first new model using Microsoft’s platform next week in a keynote in London. [2] Microsoft has also announced that it relies heavily on Nokia for its push to emerging markets like China. [3] Hence it will be interesting to see how much Microsoft’s partnership helps Nokia in its pursuit of gaining presence in smartphone market.
Understand How a Company’s Products Impact its Stock Price at Trefis
Notes:- Nokia Q3 2011 earnings results, press release, October 20th, 2011 [↩]
- Nokia CEO Stephen Elop to keynote Nokia World 2011, London, Nokia press release, October 21st, 2011 [↩]
- Microsoft Counts on Nokia Smartphones, Wall Street Journal, October 20th, 2011 [↩]