As technology moves from one generation to the next, the old champions are frequently left behind with only fading memories of former glories. That has certainly proved to be the case with Nokia (NYSE:NOK), as this one-time growth champion has become a lagging dotard in the cellphone market that it still, somehow, leads. With new management and a new operating philosophy in place, including a far-reaching partnership with Microsoft (Nasdaq:MSFT), it is time to reconsider the investment case for Nokia.

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The Problems Have Been Many
Although much is made of Apple (Nasdaq:AAPL), burying Nokia under the avalanche prompted by the iPhone, the fact is that Nokia was struggling long before that. Consider any recent innovation (going back to the clamshell design), and Nokia was almost always one of the last to be on board and usually not a good representation of the breed. In fact, Nokia couldn't even stay ahead of the likes of Research In Motion (Nasdaq:RIMM) or Palm as the cell phone world changed.

Along the way were manifold mistakes, missteps and mismanagement. Billions spent on deals for the likes of Intellisync, Navteq and OZ Communications have arguably added no value for shareholders, while products like the N-Gage may well hold a place among the worst ever brought to market.

Suffice it to say, then, there is no great surprise in the news that Nokia has lost considerable shares to Apple, Google (Nasdaq:GOOG) and Android phone makers like Samsung and HTC. In fact, it may actually be more surprising that Nokia still has the top spot - though the company owes a lot of this to its position in low-end phones in non-U.S. markets. (For related reading, see Why Do Companies Care About Their Stock Prices?)

The New Nokia
After several fits and starts, Nokia is on a new path. Stephen Elop has come in as CEO and has not been shy about trying to change how Nokia does things, all the while trying to preserve the things that Nokia legitimately does well.

The key to these efforts is the company's partnership with Microsoft to develop phones for the Windows Phone operating system. While revenue fell 13% in the latest quarter and smartphone unit shipments plummeted 38%, the first fruits of this partnership are now on the market in Europe - the Lumia 710 and 800.

Although reviewers are not hailing Lumia as an Apple-corer, the reviews have generally been rather positive and suggest it is a very worthy player in the smartphone field; particularly among those customers who are disinclined to pay any price just to have an Apple phone in their pocket. With the new phones due to hit the market in the first quarter of 2012, investors will get the first glimpse of whether or not Nokia can regain lost momentum. That said, these Lumia phones are arguably not the best that the company can do (they were designed in about six months), so success here could be a strong starting point.

Better on Balance, but Better Enough?
Nokia seems to be getting smarter. Although the Lumia may be a bit of rush job, it's not embarrassingly so - management seems to have abandoned the quick-and-easy shortcut approach to competing with superior phones. Likewise, management seems focused on patching other leaks - a restructuring of its Nokia-Siemens joint venture with Siemens (NYSE:SI) may not be a dire threat to Alcatel Lucent (NYSE:ALU) or Ericsson (Nasdaq:ERIC), but it should be less of an anchor around the company's ankles.

The biggest question is whether the company can reestablish profitable momentum. On the plus side, the Lumias looks legitimately competitive and suggests Nokia has gotten with the program in terms of design and features. On the other hand, margins are problematic and for now it looks as though these Windows phones will be less profitable. What's more, the question is very much in the air as to whether Nokia will recapture shares from the likes of Samsung or HTC (or perhaps Apple,) or whether it will simply allow the company to hold on to what it has left.

The Bottom Line
If you assume that Nokia will founder for a couple of more years and then post market-matching revenue growth along with margins only about 80% of prior levels, then the stock is still likely under-priced by more than 30%. Said differently, the market is pricing in further gradual erosion towards irrelevance, despite a very good global distribution system and a design capability that is at least competent. (Find out how to put this important component of equity analysis to work for you. For more, see Analyzing Operating Margins.)

With Europe continuing to melt down and investors in a generally risk-averse mood, buying Nokia takes quite a lot of bravery today. At a minimum, it will take a successful launch of the Lumia to get this stock working right again, but investors who are confident that this once-king can also be among the future's royalty could be looking at significant multi-year upside.

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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.