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Nokia Could Pull Off a Cinderella Comeback


Sure, it's an outside shot, and certainly Apple shouldn't be scared, but the company could stop the bleeding in the longer-term future, which would be great for the depressed stock.


You sure can't say Nokia (NOK) isn't pulling out all the stops to win back market share.

The company has announced that its US retailer AT&T (T) will start selling its Lumia 900 smartphone, running Microsoft's (MSFT) Windows Phone operating system, for $99.99 on April 8. That pushes the price (with a two-year contract) to half of the cheapest iPhone and Android phones.

On March 28, Nokia announced that starting in early April, its Lumia 800C will be available from China Telecom (CHA). In the second quarter, the company's Lumia 900, 800, 710, and 610 models will be sold by China Unicom (CHU). A phone for China Mobile (CHL) is still in the works.

At the end of February, Nokia made its first ever appearance at the annual Mobile World Conference in Barcelona, where the company introduced six new phones built on its new Microsoft Windows Phone operating system. Not bad for the first year of the companies' new partnership.

Does all of this mean Nokia is back?

No way. At least not in 2012. The company is still bleeding market share in both the high-end smartphone market and in the midlevel feature phone market.

The company's share of the smartphone market could fall to 6% by mid-2012 from an already depressed 12% at the end of 2011. Operating margins are still falling, and revenue is forecast to decline again in 2012.

But there are signs that new CEO Stephen Elop could see his strategy stabilize market share in 2013, with about 13% of the global smartphone market.

That's not enough to make Apple (AAPL) or Samsung (SSNLF.PK) quake in their boots (or to restore Nokia's stock to the $14.21 it sold for on April 6, 2010, or the $34.51 of November 6, 2007), but I can see $7.80 a share in a year. That would be a 44% gain from the March 29 price of $5.42.

Which is why I added Nokia to my Jubak's Picks portfolio on March 30 (The stock is already a member of my long-term Jubak Picks 50 portfolio.)

Why does Nokia stand a chance of recouping even that much of the market and its share price? Because as the AT&T deal shows, system operators are looking for another platform to help them in their battles with Apple and the big Android-makers such as Samsung over who gets what piece of the pie.

Analysts estimate that AT&T will subsidize each Nokia Lumia selling for $99 to the tune of $350. That's a major commitment by AT&T, but it makes sense when you compare it to the $450 subsidy that AT&T pays Apple on the cheapest iPhone 4S at $199 with a two-year contract.

Even if the Lumia doesn't drive a lot of sales at AT&T, it would be worth it to the company if Nokia's new phones put enough pressure on Apple to reduce that subsidy. Because while the Android market is dominated by a very strong Samsung, companies such as HTC and Motorola (MMI) are relatively weak hands with limited brand recognition and marketing networks that don't begin to compete with Nokia's.

Credit Suisse estimates that by taking share from these weaker Android companies and from floundering BlackBerry maker Research In Motion (RIMM), Nokia can rebuild its market share to 13%. As part of that recovery at Nokia, Microsoft's operating system would gain a 20% share, enough to make it a viable third platform.

Because Nokia remains a power at the extreme low-end of the mobile phone market. Even with all of its troubles, Nokia shipped 260 million extreme-low end phones in 2011. This segment of Nokia's business actually grew unit volumes in 2011 by 11%, despite intense competition from Asian phone makers.

The continued strength in this segment to a degree offsets the rapid death of phones based on Nokia's heritage Symbian operating system and the company's loss of share in the midmarket feature phone segment.

Credit Suisse expects Nokia to ship 30 million Windows Phone smartphones in 2012 and 100 million in 2013.

But before you get all starry-eyed about those numbers, take a deep breath. Nokia's ability to do more than crawl off the bottom of its current pit depends on Microsoft's ability to churn out new and compelling updates of the Windows Phone operating system on a schedule that can keep up with Apple's relentless upgrade cycle for the smartphone. (Remember Windows Mobile? No? Nobody else does either.)

Already we've seen Apple's response to the Microsoft challenge to the iPad - Apple got a new iPad out in March and will get a new version of its operating system out in the summer, to raise the bar before Microsoft gets Windows 8 - an operating system expected to make tablets and desktops look and feel more alike - to the market in the fall.

Microsoft got its Windows Phone 7.5 update, Mango, into release in September 2011. A relatively minor update, Tango, is scheduled for the second quarter of 2012, and the big improvement to the operating system, Apollo, is rumored on tech websites for the fourth quarter of 2012.

If Microsoft can meet that schedule, and if Nokia can build compelling phones around the hardware, then, maybe, investors in Nokia can expect that $7.80 a share wouldn't be the end of the line for Nokia's stock.

It would help, too, if Windows 8 actually got to market in the fall of 2012 and turned out to justify its current positive buzz. Nokia could use a little buzz right now.

Editor's Note: This article was written by Jim Jubak of MoneyShow.

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