The Lumia is Nokia (NOK)’s new Windows Phone 8, which uses the Windows 8 mobile operating system developed by Microsoft (MSFT). I profiled Windows 8 previously, (article here), and critics have been generally impressed. According to early data coming out of Germany, consumers have been impressed as well. The Lumia 920, sold exclusively by AT&T for 99.99 has been back listed on Amazon for 1-2 weeks in the United States. Analysts have praised Nokia’s aggressive pricing of Lumia, but sale projections have been modest after Nokia’s previous attempt to break into the smart phone market, Symbian, failed miserably and was outclassed in every way by Windows, iOS, and Android. The Lumia features an 8.7 MP camera, wireless charging, and a sleek yet simple design. The hardware and the software have both been well received. The question which remains to be answered is whether people will embrace the Windows Phone while Microsoft is still growing its infant app store. While analysts generally doubt that Nokia will win away loyal Android or iPhone customers, I believe that the high quality and affordability of the phone will allow Nokia to capture many of the first time smart phone buyers, both in the United States and internationally, who will be more willing to gradually add more apps as the Microsoft App store grows. Nokia’s CEO has stressed that what the Lumia will lack in quantity of apps, it will make up for with high quality popular apps. Market research by Gartner Inc predicts that the smart phone sales will grow by 40% next year to 645 million units. This market growth gives Nokia and Microsoft plenty of room to grow without having to fight current Google or Apple for current Android of iOS users. Microsoft has also invested heavily in cultivating an App store for Windows 8, and has reached out to app developers and attempted to get them excited about Windows.
Currently, smartphones represent 50% of all phones sold in the United States, and Nokia is a distant third in marketshare. Gartner Inc. did a study predicting that Windows 8 could climb to #2 in market share behind Android by 2015, capturing 21% market share. Strategy Analytics predicted that by the end of 2012 however, Windows 8 will only have 4% market share, up slightly from the 3% Windows had prior to 2012. Nokia’s current valuation seems to indicate that the market is not expecting the Lumia to significantly alter Nokia’s market share. Early sales and product reviews seem to indicate that this assumption is a mistake.
The margin of safety provided by Nokia’s strong patent portfolio, combined with the continued profitability of Mobile Devices, Location and Commerce, and Nokia Siemens Network will provide Nokia with the cash flow and time needed to complete their restructuring. Nokia’s dominant position in emerging markets, coupled with the promise shown in Smart Devices with Lumia offers an excellent growth prospect.
From the date my first article on Nokia was published (11/30/2012) until the time of writing (Market Close, 12/5/12), Nokia is up 20.69%. One potential explanation for this rapid appreciation of share price is that Nokia is a heavily shorted stock, with a short float of approximately 8% of the total float. This means that short sellers have borrowed 8% of all Nokia shares outstanding and bet that Nokia’s share price will go down. When the share price goes up, these short sellers are forced to buy back the stock, to cover their short. The number of shares outstanding divided by the average number of shares traded per day is known as the Days to Cover. This is an estimate of how long it will take short sellers to cover their shorts.
Below, I’ve attached a graph from Nasdaq.com of the change in days to cover over time for Nokia.
It is clearly visible that as of the most recently available data, (late November), days to cover for Nokia was at an all-time high. This means that any significant upward movement in the price of Nokia will induce a panic in short-sellers causing a nearly two week rally. The announcement of two sales on non-core assets at the beginning of the week gave Nokia a 4% bump which may have set off a wave of short covering by short sellers, known as a short squeeze.
Despite this meteoric rise, Nokia is still valued attractively for the long term growth prospects it offers. A short squeeze causes stocks to rally for a few days, however Nokia has the management and the resources to complete a true, full recovery over the next few years.