Is Nokia’s Stock a Buy with the New Catalyst?

Nokia (NYSE:NOK) has not given its investors much reason for confidence over the last few years. It’s a case of how the mighty have fallen. The Finnish company, once a leader in the global mobile phone market, has lost 95 percent of its market value since 2007! That was the year the first iPhone was released. Nokia fell to an 18-year low of $1.64 on July 18, a day before it was to report second-quarter earnings. On Wednesday, the stock was once again in trouble, the fall strangely coinciding with the launch of new Windows 8-powered Lumia handsets.

Does it make any sense to invest in the stock? Let’s analyze it with three relevant sections of our CHEAT SHEET investing framework.

C = Catalyst for a Stock’s Movement

Nokia’s big gamble of letting go of its own proprietary smartphone software in favor of Microsoft’s (NASDAQ:MSFT) Windows Phone hasn’t received expected payback yet. However, with Microsoft readying to launch a new, improved, touch-friendly version of its mobile software soon, Nokia’s new Lumia handset line is expected to be a big catalyst. Unfortunately for the Finnish company, if the stock’s reaction to the announcement of the new phones on Wednesday is anything to go by, the signs are worrying. Nokia shares dropped more than 11 percent in the minutes following the launch.

While it’s obviously too early to predict how the new handsets will eventually perform, there is immense pressure on the company for this product. As the Brussels-based KBC Asset Management SA expert Leon Cappaert said: “If they don’t come out with a super phone that is really a game changer, we will see a pullback again in the stock.”

Nokia’s shares had risen 50 percent between August 10 and October 27 last year just before the first Windows-based Lumia handsets were to be announced. But they fell 73 percent from October 27 to July 18 as shipments figures of the flagship device stayed disappointing.

E = Earnings Are Increasing Quarter-Over-Quarter

The impact of its dropping market share has been reflected in Nokia’s falling earnings over the past few quarters. Last quarter, Nokia posted a net loss of $1.72 billion, higher than its loss of $58 million in the same period last year. Overall sales dropped, too. For the coming quarter, analysts have now cut their estimates: down to $8.8 billion from $11.6 billion at the start of the year. Chief executive Stephen Elop accepted that the coming quarter would “remain difficult.”

Earnings for the coming quarters will depend on how successful the company’s new Windows Phone handsets turn out to be, though some analysts are worried that a lack of Plan B, if they don’t, may end up hurting Nokia much more.

E = Excellent Relative Performance Versus Peers and Sector

Nokia, the world’s largest handset maker for 14 years, has rapidly lost its market share as Apple (NASDAQ:AAPL) and manufacturers using Google’s (NASDAQ:GOOG) Android software, such as Samsung and HTC, become ultra successful. Nokia’s traditional phones did extremely well a few years ago, but the advent of smartphones, and the lack of a competitive product from it has bitten the Finnish company. Earlier this year, Samsung overtook Nokia for the top spot in mobile phones overall.

Nokia sold 4 million Windows Phones in the second quarter, a fraction of Apple’s sales of 26 million iPhones and Samsung’s 50 million devices. Android and Apple devices together have an 85 percent share of the worldwide market currently, according to IDC, with Nokia’s Symbian and Windows Phone devices being forced to split the rest of the market with Research In Motion (NASDAQ:RIMM) and other smaller platforms. For the stock to start seeing any signs of spurt, Nokia will have to start building from the bottom up, not an easy task as Apple prepares to announce its new iPhone presumably next week.

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