Mobile phone giant Nokia (NOK) is taking significant steps to reverse the fortune of its ailing cellphone business. CEO Stephen Elop, who joined the company last September, outlined a number of changes aimed at restoring Nokia to a leadership position in the smartphone market. These moves include putting in place a new leadership team and implementing a new organizational structure that will create distinct business units for smart devices and more basic mobile phones. The biggest news was that the company would be teaming up with Microsoft (MSFT - Free Microsoft Stock Report) to upgrade Nokia's smartphone portfolio.

Though still the world's largest maker of cellphones, Nokia's share of the overall market has steadily eroded in recent years. In particular, it has struggled to develop the highly profitable, upscale offerings that could compete with the likes of Apple's (AAPL) iPhone, Research in Motion's (RIMM) Blackberry devices, and phones based on Google's (GOOG) Android software. This weakness has taken a toll on the company's margins and profits. Earnings have been cut by more than half since 2007, with share net falling almost 15% last year.

Going forward, Nokia will use the Windows Phone as its primary smartphone platform. The company's relationship with Microsoft should be facilitated by Mr. Elop's considerable experience with the software giant. In fact, prior to assuming his current role, Mr. Elop served as head of Microsoft's Business division. Still, the transition to a Windows Phone-driven portfolio will likely include its share of challenges and uncertainties, such as the future role of Symbian. This operating system, which Nokia uses to power on its current lineup of upscale phones, has an installed base of 200 million users. As part of the new strategic initiative, Symbian will become a franchise platform, and Nokia still expects to sell another 150 million of Symbian devices in the future.

Investors have responded cooly to the latest moves announced by Nokia, as shares of the cellphone maker declined over 15% earlier today. (Microsoft shares were down just slightly in a relatively flat market.) At the current valuation, the stock has considerable, albeit speculative, long-term upside. This will likely be contingent on the Nokia and Microsoft collaboration developing devices that resonate with consumers, and Nokia will be trying to play catch up with formidable competitors, such as Apple and Google. Overall, then, we suspect most NOK investors would be best served remaining on the sidelines until there are more concrete indications that the company will be able to do this. More aggressive investors might want to watch the situation and act should signs this linkup show some promise.


At the time of this article’s writing, the author did not have positions in any of the companies mentioned.