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Nokia Strikes While the Iron Is Hot

By Eric Jhonsa - Updated Apr 6, 2017 at 2:07PM

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With consumers gravitating toward Nokia's cheaper phones, the company cuts prices.

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.

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