Nokia's Desperate Gamble

As part of its scramble to catch up to Google (Nasdaq: GOOG  ) Android and Apple (Nasdaq: AAPL  ) in the smartphone game, Nokia (NYSE: NOK  ) has finally launched its long-awaited Windows handset. Called the Lumia 800, it's the first smartphone to come out of Nokia's strategic partnership with Microsoft (Nasdaq: MSFT  ) .

"Lumia means light," Nokia CEO Stephen Elop told the Nokia World Conference in London, "and a new dawn for Nokia." Following fast on the heels of better-than-expected third-quarter earnings, this handset launch just might be the first rays of a rising sun for the benighted mobile-phone giant.

But first, the bad news
For the most recent third quarter:

  • Revenue was down from $14.3 billion to $12.5 billion.
  • Operating profit was down from $532 million to $71 million.
  • EPS was down from $0.19 to ($0.03).

Believe it or not, as terrible as these numbers are, they're better than analysts predicted. In happier news:

  • Cash flow from operations was up from $595 million to $1.15 billion.
  • Cash and other liquid assets were up from $14.4 billion to $15.0 billion.

Nokia is still the world's largest mobile-phone manufacturer by volume. As such, the company continues to throw off a lot of cash at an increasing rate, further fattening its already healthy balance sheet. And with no long-term debt, it can operate in this current essentially profitless condition for a considerable time, until its higher-margin smartphone business takes hold. That's the plan, at least.

So far, so good
The Lumia 800 is initially only being offered in Europe and Asia and won't be offered in the U.S. until 2012. Some analysts expressed their disappointment at this, but it makes sense.

Much like its old rival Ericsson (Nasdaq: ERIC  ) , Nokia's mobile phones, once ubiquitous in the U.S., are now practically nonexistent. Nokia sells most of its phones overseas, particularly in emerging markets, and that's where the company's brand goes the deepest, where its marketing is the most thought out, and where its distribution infrastructure is the most tried and true. So why not start the rollout abroad, work out the inevitable bugs, and then try to reconquer the states. Nokia's emerging-market experience could be a real competitive advantage going forward.

In another smart move, Nokia hasn't forgotten to address an aspect crucial to any successful smartphone strategy -- the user ecosystem. If the company is to compete effectively and create a viable third smartphone market all its own, it has to build an ecosystem surrounding its product that will be interesting enough to attract new users and sticky enough to keep them around. As such, the Lumia rollout includes a range of new, surrounding services in music, location, social networking, and gaming.

Trying to teach Apple a few lessons
Nokia also unveiled a second smartphone as part of its rollout, the Lumia 710. In an attempt to fill a market niche, or maybe make one, between the high-end smartphone market Apple and Android serve and the feature-phone space Nokia currently inhabits, the 710 will be priced much more aggressively than the flagship 800.

The Foolish bottom line
On the news of the Lumia launch, share prices for Nokia rose as high as $7.35, up from $6.75. The price has since settled around $7.15. Elop and Nokia shareholders, no doubt, would like to see more of this. But the buzz around the Lumia launch also made the P/E jump significantly, from around 14 before the launch to 26 now.

Nokia could be on the verge of something big here, but if a battling mobile-phone giant doesn't suit your fancy, it's certainly not the only company in the market poised to pop. Our analysts have identified a breakthrough tech company set to change the face of business. Learn more in our special free report, "The Only Stock You Need to Profit From the New Technology Revolution." Get your copy while it's still available by clicking here now.

Fool contributor John Grgurich would love to hang out with some Finnish reindeer, but he owns no shares of any of the companies listed in this column. The Motley Fool owns shares of Google, Apple, and Microsoft. Motley Fool newsletter services have recommended buying shares of Microsoft, Google, and Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Microsoft. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a scintillating disclosure policy.


Read/Post Comments (3) | Recommend This Article (3)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 02, 2011, at 12:29 AM, techy46 wrote:

    Nokia needs L800, L701 phones and T800 tablets in US by Spring of 2012. Microsoft needs Windows 8 RTM by Spring 2012. Then we'll have a three horse race with 5 laps to go.

  • Report this Comment On November 02, 2011, at 11:09 AM, XMFGrgurich wrote:

    Yeah, the tablet angle is something I hadn't really thought of. Good thinking. Overall, this is going to be an interesting situation to watch develop. Thanks for the comment, techy46.

  • Report this Comment On November 03, 2011, at 2:39 PM, techy46 wrote:

    Nokia selects ST-Ericsson's dual-core NovaThor chips which will provide for under $200 Windows smart phones.

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