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3 Trading Ideas As Microsoft Enters Cheap Phone Segment

Tickers in this article: MSFT NOK QCOM

Microsoft (MSFT) is expanding its Windows Phone (“WP”) globally, by partnering with Huawei Technologies. Sporting a Qualcomm (QCOM) Snapdragon S4 running at 1.2 gigahertz (dual core), the 4Afrika model will be tailored for the African market. Shortly afterwards, the phone will be released in the nearby regions, including Egypt and Kenya. Competition for gaining users is fierce: Nokia’s (NOK) once-dominant position in phones is declining globally. Now, Android-based devices are dominating emerging markets. [More tech articles: Activision: Don’t Miss Out on This Content Dominator]

In North America, Nokia’s Lumia 620 is a entry-level smartphone that is receiving good reviews. The device is available on many color cases, is a solid build, and runs Qualcomm’s 1Ghz Snapdragon S4 processor. The display is a rich 3.8-inch, with a resolution of 800 x 480. The device has just 512MB of RAM, but a microSD reader supports storage expansion. Microsoft is promoting its “cloud” offering, giving users 7GB of cloud storage with “SkyDrive.”

Analysis

Nokia already has a successful line in the feature-phone segment. The Asha line-up grew well last quarter. Strategically, both Microsoft and Nokia need to make a WP-based device to increase in the global market. Cheap devices are already making nearly no profits for phone makers, so it will be the software applications and services that will matter. For Microsoft, getting more WP-based users will be at the core of the company’s strategy for global growth.

In late October 2012, Nokia announced a $200 unsubsidized WP 7.5 model. The Lumia 510 runs on Qualcomm’s processor, is 800MHz and has a 5MP camera. The latest partnership Microsoft will have with Huawei should help the company reach the all-important $100 price-level.

Business Section: Investing Ideas

Entering the low-priced phone segment will be low-risk for Microsoft, since it is in partnership with a phone maker great at making inexpensive phones. Microsoft recently traded with a P/E of around 15.

Nokia will not be harmed, either. Asha is a separate line that diversifies Nokia’s reliance from Microsoft. Over time, Nokia could continue to focus on the mid- to high-end Lumia devices. These models offer a richer gross margin. Nokia’s market capitalization was recently around $15.6 billion, nearly double the level from December.

Qualcomm is a winner from Microsoft’s partnership. This is why Qualcomm shares are near a 52-week high, trading recently above $66.

 

Written by KAPITALL Contributor Chris Lau