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Nokia Strikes While the Iron Is Hot

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Over the years, Nokia (NYSE: NOK  ) has been quite the opportunist. If the Finnish phone giant sees a chance to steal market share by taking advantage of favorable industry conditions and/or struggling competitors, it usually does so so, even if its beloved profit margins take a short-term hit. With Reuters reporting that Nokia just slashed prices by as much as 10% for much of its handset line, the company may once again be up to its old tricks.

You might not think that Nokia needs to be this aggressive with its pricing right now, considering that the company just reported blowout fourth-quarter results in which per-share earnings came in $0.10 above consensus estimates. But these results had a lot to do with a shift in industry demand during the quarter toward cheaper phones, and sales to developing markets.

Cheaper phones dominate
Need proof? Take a look at the geographic breakdown on Nokia's results. The company saw annual unit shipment growth of 34% in the Middle East and Africa; 36% in the "Greater China" region; and 15% in the Asia-Pacific region. Meanwhile, though Nokia claims it gained market share in its European heartland, it nonetheless reported a 1% annual shipment decline for the region. Not to mention a 7% decline in North America, which now accounts for a mere 3% of Nokia's phone volume.

This shift toward cheaper phones and developing markets was harmful to Qualcomm (Nasdaq: QCOM  ) , whose revenues are strongly tied to sales of 3G phones in developed markets. And even to Apple (Nasdaq: AAPL  ) , which, according to ABI Research, saw its smartphone market share drop from 18.1% in Q3 to 16.6% in Q4. Yet it had just the opposite effect on Nokia, whose reported Q4 average selling price (ASP) of about $88 (based on the current euro/dollar exchange rate) was well below the $117.55 industry ASP reported by ABI, and less than half the $184 reported by Qualcomm on the phones for which it receives royalties. Never mind the incredible $620 ASP reported by Apple for the iPhone.

Nokia takes advantage
The problem with this mix shift, from Nokia's standpoint, is that it's not something that the company can rely on to maintain its market position going forward. Not as consumer spending recovers in developed nations, and not as growing wireless penetration rates in developing nations mean that there are fewer cheap phones to sell to first-time buyers. The market seems to understand this, and that's why, in the aftermath of the blowout Q4 numbers, Nokia's 2010 and 2011 consensus earnings estimates have ticked up by only $0.05/share and $0.02/share, respectively.

So, instead of resting on its Q4 laurels, Nokia has decided to take part in some serious price-cutting. By doing this, I'm guessing that Nokia is not only trying to pad its near-term market share, but also add to its unmatched economies of scale, and further put the hurt on struggling rivals such as Motorola (NYSE: MOT  ) and Sony Ericsson.

Over the long run, I think Nokia still has some major competitive issues to address in the consumer smartphone space. Driving this point home are the mostly flat sequential shipments of its high-end N-Series smartphones (the closest thing Nokia has to an iPhone competitor) during the strongest quarter of the year.

But all the same, industry trends are in the company's favor over the short term. If you don't expect Nokia to take advantage of them to sell more phones, then you don't know the company too well.

Fool contributor Eric Jhonsa has no position in any of the companies mentioned. Nokia is a Motley Fool Inside Value selection. Apple is a Motley Fool Stock Advisor pick. Try any of our Foolish newsletters today, free for 30 days. The Fool has a disclosure policy.

Read/Post Comments (7) | Recommend This Article (7)

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  • Report this Comment On February 02, 2010, at 3:35 PM, ConstableOdo wrote:

    Why is Nokia so hot on holding onto market share and losing money selling all those low-end cellphones?

  • Report this Comment On February 02, 2010, at 3:53 PM, jjw120 wrote:

    Cheaper phones may dominate, but they don't make money.

    Also, before you talk about market share in smart phones you need to define what a smart phone is. At this point, I don't think Nokia even makes what I would call a smart phone.

    Lastly, Nokia's profits while better than last year are still anemic.

    I wouldn't want to be a long term investor in Nokia at this time. They haven't proven that they can compete at the high end and if they are unable to compete at the high end, then they will be a very poor investment.


  • Report this Comment On February 02, 2010, at 4:04 PM, Inept wrote:

    Eric, I think you mischaracterize Nokia's most recent quarter. Nokia's smartphone ASP was down a few Euro but total ASP was up 1 Euro sequentially.

    This suggests that the shift was not towards cheap phones, as you assert, but in exactly the opposite direction. 16.4% of the phones Nokia sold this quarter were smartphones and they accounted for 47.5% of sales in the company's Devices and Services group. Nokia shipped more smartphones this past quarter than it ever has in the past.

    Nokia's volume growth in smartphones also lead the industry aggregate growth rate both sequentially and year-over-year.

    I think Nokia's doing a good job of shifting its mix toward smartphones to improve margins while simultaneously making smartphones cheaper and more accessible to the developing countries you cite.

  • Report this Comment On February 02, 2010, at 4:09 PM, Nokiabiggest wrote:

    Nokia is here in Europe and elsewhere, except in North America and a large current. Nokia has really great potential and is able to continually bring in new smartphones on the market. Apple's problem is that they have only the one and only in the so-called old-fashioned. smartphone. IPhone will remain identical as the shooting stars was a Motorola Razl which no one any more from others. The winner and the amount of the Finnish national treasure Nokia;)

  • Report this Comment On February 02, 2010, at 4:11 PM, Nokiabiggest wrote:

    Nokia is here in Europe and elsewhere, except in North America and a large current. Nokia has really great potential and is able to continually bring in new smartphones on the market. Apple's problem is that they have only the one and only in the so-called old-fashioned. smartphone. IPhone will remain identical as the shooting stars was a Motorola Razl which no one any more from others. The winner and the amount of the Finnish national treasure Nokia;)

  • Report this Comment On February 02, 2010, at 4:12 PM, daveshouston wrote:

    @J.J. Couldn't agree more. A REAL smartphone is really a small handheld computer. A computer needs a real computer operating system. That's what Apple has and that's what Palm and Google have.

    The other competitors like Nokia, RIM (Blackberry), Microsoft Windows Mobile, etc. are trying to patch a small operating system designed for cell phones. Trying to make a cell phone operating system into a computer operating system with add-ons is about like attempting to make a school bus out of a station wagon. It can be done but it won't be pretty.

    Even if Nokia were to dump Symbian and redesign all of their multi-function phones to run their version of Linux, they would have only solved part of the problem. There is still the fast growing Apple iTunes eco-system with 140,000 apps and billions of downloads to date. Even if they could design the greatest cell phone ever invented they'd still be years behind Apple in building that all important eco-system. Best thing for Nokia to do is start shopping for a white flag.

  • Report this Comment On February 02, 2010, at 5:25 PM, Inept wrote:

    Hi Eric,

    Yes, no doubt that Nokia's smartphone ASPs are lower than the rest of the industry, but this is by design. Nokia offers something for everyone and that includes in the smartphone market segment. It ties in directly with the unit growth in emerging markets that you cite and what I noted in my original comment above in regards to Nokia making smartphones more accessible to lower-income consumers.

    Just because more phones are going to China and India doesn't mean they're all 15 Euro (or even 40 Euro - Nokia's mobile phone ASP) cheapies. Let's also not forget that there are pockets of substantial wealth in China and India where Nokia is a monolith. Consider Hong Kong, for example. Not an emerging market, a major consumer of high end Nokia phones, but in China.

    At some point in the not-too-distant future, all phones will be smartphones. Nokia is very well positioned to profitably backfill emerging market demand by supplying smartphones at pricepoints where Apple, RIM, Google and others have very little interest in competing. Nokia plays in the high end too, mind you, with 10M touchscreens shipped last quarter. This is accretive to the bottom line but it seems to me that perhaps Nokia is quietly conquering the world of mobile phones for a second time while all the fanfare directs attention elsewhere.

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