Motorola Flops at Trade Show; Nokia Shines

GPS and location-based services are a huge growth area for the handset industry, something that bodes well for Nokia in particular after it dropped some of its newest products in Spain. Shipments of GPS-enabled mobile phones will generate $100 billion in revenue in 2012, up from $50 billion in 2008, according to ABI Research, a market intelligence firm. That's a big trough from which to feed and Nokia's muscled its way to the front of the herd.

"There's a lot of growth and activity in the GPS-enabled handset space," says ABI analyst Clint Wheelock, "and Nokia is really leading the charge with their strong commitment to GPS."

Nokia, already the No. 1 cellphone maker with 40% of the global market, launched four new devices with built-in GPS, as well as new location-based services, notably Maps 2.0. The updated Maps service adds much welcome features for pedestrians, meaning you can get turn-by-turn directions if you're on foot. That seems like a no-brainer when it comes to GPS in a cellphone.

Citigroup analyst Sherief Bakr, who rates shares at Buy, characterized Nokia's new offerings as an impressive lineup that should help the company maintain its leadership position. That bodes well for Nokia shareholders, as the company needs to prove that it can maintain its market share and margins — something it's struggled with in the past.

Separately, and somewhat curiously, touch screens were notably absent in the new Nokia devices. Ever since Apple (AAPL) launched the iPhone, handset makers have been scrambling to add touch screens to their phones. "Nokia's still doing some very interesting things with user interfaces and product design," Wheelock says. "But they're signaling that they don't expect to introduce some touch screen products until later this year." It's not clear why that's so.

Apart from the strong product refresh and leading position in GPS, there are other reasons to feel bullish about Nokia's long-term prospects. For one, it has a truly global business. Indeed, only about 4% of its handset volume comes from North America. That should help insulate it somewhat from a downturn in the U.S. economy. And then there's the case that shares are compellingly valued, with a forward price/earnings multiple of 13. That's less than one percentage point below analysts' long-term growth rate, according to Thomson Financial, and offers a significant discount to the broader market.

Motorola, of course, has bigger problems than putting touch screens in its cellphones. Just a couple of weeks ago the No. 3 handset maker said it was considering jettisoning the beleaguered cellphone business. But at the Mobile World Congress, Chief Executive Greg Brown said the company remains fully committed to the money-losing division. So the situation is unclear. Oppenheimer analyst Ittai Kidron, who rates shares at Buy, said Motorola still hasn't decided what it's going to do.

"Strategically, management indicated there are two parties looking into its handset unit, although no specific type of combination was mentioned (sale, [joint venture], etc.)," the analyst wrote in a note following a meeting with Motorola executives. "We believe a decision needs to come quickly for value to be unlocked."

Either way, Moto's going to need a bunch of hit phones to have any hope of recovery in the core business, and it sure didn't blow anyone away in Barcelona. The company unveiled a paltry lineup, consisting of an update to an existing model and a couple of low-end (read: low margin) phones.

Making matters worse, No. 2 maker Samsung dropped a dozen new devices at the trade show, covering just about every sector of the market. "Samsung still has a way to go in the usability of some of their products, but I think they're good enough to keep beating up on Motorola," Wheelock says. "Motorola is probably at least a year away, maybe 18 months, from having a product portfolio that's truly competitive, and I think they're going to see continued erosion of their market share in the course of the next year."

We were impressed with the handsets Motorola debuted at the Consumer Electronics Show in Las Vegas last month, but it's clear the company's got a lot of work to do to halt its slide. Moto's stock will likely pop if it does decide on a sale, spinoff or joint venture for the handset business, but we'd leave that play to the traders. As a long-term holding the outlook is still too murky to like this story. With a forward P/E of 18, the shares aren't discounted enough for our taste, especially when analysts' average long-term growth rate stands at less than 10%.