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Nokia Corporation (ADR) (NOK)’s Fate Is Tied To China: China Mobile Ltd. (ADR) (CHL)

Nokia’s partnership with China Mobile Ltd. (ADR) (NYSE:CHL)

Nokia Corporation (ADR) (NYSE:NOK)’s stock price has improved by 120% since its July low of $1.63. Two of the primary reasons for the run-up in the stock price were reports that its new Lumia smartphones were selling out in phone stores around the world, as well as the announcement that it had inked an exclusive deal to sell its phones to China Mobile Ltd. (ADR) (NYSE:CHL), the world’s biggest mobile operator.  We now know that the fourth quarter sales numbers for Lumia smartphones were not as high as Nokia investors had hoped for. However, when it comes to China Mobile Ltd. (ADR) (NYSE:CHL), it is still too early to accurately predict the number of Lumia smartphones that Nokia will sell as a result of its Dec. 5, 2012 partnership deal.  Analysts have said that Nokia needs to sell 10 million Lumia’s per quarter in order to stay in business. That is why it is so important for its partnership with China Mobile to work.

Fourth quarter results showed that sales of Nokia Corporation (ADR) (NYSE:NOK) smartphones in China Mobile Ltd. (ADR) (NYSE:CHL) were down by 79%. However, the Nokia/China Mobile partnership did not go into effect until the first quarter of 2013, and as a result of the partnership, sales of its Lumia smartphones are sure to increase. What is in question is whether the partnership arrangement will push the sales of Lumia’s near to the 10 million quarterly sales point that may be required to keep Nokia afloat. While on paper the Nokia/China Mobile deal looks great, it is hard to predict how it will affect Nokia’s smartphone sales because it will still have to fend off Apple and its iPhones, as well as Google Inc. (NASDAQ:GOOG) and the phones that use its Android operating system.

Company analysis

After six straight quarters of losses, Nokia Corporation (ADR) (NYSE:NOK) finally turned a profit in the fourth quarter. However, the way that Nokia made its profit brought up more questions than answers. The company made a profit by cost cutting and through its partnership with Siemens. Unfortunately, its revenues were down by 25% on a year-over-year basis. It is nice that the company was able to turn a profit, but sooner rather than later it will need to increase revenues, and it will need to do that through the sales of it smartphones. The company’s smartphone sales are falling in Latin America and Asia, and are losing ground to Apple and Samsung in North America. This means that the company’s best chance of remaining profitable is through its partnership with China Mobile Ltd. (ADR) (NYSE:CHL) in China. The problem for investors is that there are big uncertainties that come with the China Mobile partnership. For instance:

How many Lumia smartphones can China Mobile sell?

Will China Mobile have to sell Lumia smartphones at a discount in order to compete?

Will the sellers of Apple iPhones and Google’s Android based smartphones reduce their prices in order to maintain market share?

Nokia Corporation (ADR) (NYSE:NOK) CEO Stephen Elop has bet the company’s future on the success or failure of its Lumia smartphones. If its Lumia smartphones sales are successful in China Mr. Elop will be a winner and Nokia will survive–if sales slump Mr. Elop will be a loser and Nokia’s future will be uncertain.

Stock analysis

Nokia Corporation (ADR) (NYSE:NOK)’s future is still very uncertain, and after a better than 120% run-up in its stock price over the last six months, its stock, which has recently been falling, could be in danger of taking an even greater hit. I will not recommend this stock to investors until I see evidence that Nokia’s China strategy will prove successful.

The article Nokia’s Fate Is Tied To China originally appeared on and is written by Max Fisher.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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