by Tom Taulli | February 25, 2013 12:54 pm
While the smartphone market continues to grow and evolve, the fact remains that it is a duopoly of two mega players: Apple (NASDAQ:AAPL) and Samsung. Each generates out-sized profits, which allows for huge marketing efforts as well as massive amounts of R&D for new cutting-edge devices.
In light of this, can another player really make inroads?
Well, Nokia (NYSE:NOK) sure thinks it can. But the company realizes that the strategy must be to find ways to leap-frog Apple and Samsung … and this means focusing on the low-end market.
The good news is that Nokia has a long history in this category. In the latest quarter, Nokia sold 12.8 million units in the Middle East and Africa, 11 million units in Latin America and 4.6 million units in China. In fact, one of the company’s low-end devices — the Nokia 1280 — has sold about 120 million units since 2010.
Now there’s a new version, called the Nokia 105. It’s a basic device, with a small screen and access to email … and the price tag is only $20!
While this of course means the margins will be extremely thin, it also caters to the likely billions of people who will never be able to afford smartphones. What’s more, as wealth continues to grow in emerging markets, some of the customers who buy Nokia 105’s will likely upgrade to a smartphone. So if the experience is good, there’s a chance that the they will consider a Nokia smartphone.
This is one reason why the company’s Lumia models are important. It’s not just about taking away marketshare in the U.S. and Europe; it could instead be a long-term strategy to leverage its massive existing base.
Plus, there is still an opportunity to get an edge on Apple and Samsung. It is getting tough for the companies to add must-have features, which may mean lead to commoditization of the smartphone market. This could wind up benefiting Nokia since its Lumia is being priced at discounted levels.
While the strategy is risky, Nokia does have the financial backing of Microsoft (NASDAQ:MSFT), which desperately needs to be a player in the mobile world. The company is also getting support from the carriers like Verizon (NYSE:VZ) and AT&T (NYSE:T) since they want to move away from providing subsidies. The third option of the Lumia gives them more negotiating power against Apple and Samsung.
All in all, Nokia does have a chance to turn things around. The company has a well thought-out strategy, along with a huge global footprint, tremendous hardware capabilities, a low-end niche and a smartphone that is gaining traction. The combination could lead to renewed growth over the next few years. Plus, the company looks undervalued with a price-to-sales ratio of a mere 0.36.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of “How to Create the Next Facebook” and “High-Profit IPO Strategies: Finding Breakout IPOs for Investors and Traders.” Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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