Nokia – An Upside and Downside Scenario

December 9th, 2010 by Trefis Team
+14.12%
Upside
3.52
Market
4.02
Trefis
NOK: Nokia logo
NOK
Nokia

Nokia (NYSE:NOK), which competes with Apple (NASDAQ:AAPL), Motorola (NYSE:MOT) and Research in Motion (NASDAQ:RIMM) in the mobile phone market, has been losing market share in the last few years.

We estimate that mobile phone operations in emerging markets constitutes around 53% of the $12.43 Trefis price estimate for Nokia’s stock, which is about 23% above the current market price. Below we look at potential upside and downside scenarios for Nokia that focus on two important drivers to its share price – market share and margins in emerging market operations.

[trefis_forecast ticker=”NOK” driver=”0058″]

-10% Downside – Market Share Loss

Relevant Articles
  1. Is Nokia Stock A Buy At $4?
  2. Nokia Stock Looks Undervalued At $4
  3. Nokia Stock Poised For Recovery After Dismal Week?
  4. Nokia Stock Looks Set For Rally After Rough Month
  5. Can Nokia Stock Continue Weathering The Storm In The Broader Markets?
  6. Can Nokia Stock Continue Its Post-Earnings Outperformance?

Nokia’s mobile phone market share in emerging markets (China, India, Brazil, etc.) is expected to decline from 44% in 2008 to 40% in 2010, and we expect it to continue to decline to 34% by the end of Trefis forecast period.  However, Nokia’s market share declines could be much faster than initially thought. An IDC report mentioned that Nokia’s share in the Indian mobile phone market declined rapidly from 57% in Q2 2009 to 36% in Q2 2010. [1] [2]

India is the second most important emerging market for Nokia, after China, and hence such large market share declines in quick time does not bode well for Nokia. There could be downside of 10% to the $12.43 Trefis price estimate for Nokia stock if its share in emerging markets declines to around 26% by the end of the Trefis forecast period.

+15% Upside – Profit Margins Stable on Cost Cutting Measures

Nokia’s EBIT margins (a measure of profit margins) have almost halved from 20% in 2007 to around 10.5% in 2010, and we expect the margins to continue to decline to around 8% by the end of Trefis forecast period.

[trefis_forecast ticker=”NOK” driver=”0647″]

However, recently appointed Nokia CEO Stephen Elop announced measures to increase the efficiency of new product launches and improve profitability. [3] Specifically, he highlighted a 3% reduction in the Nokia work force and emphasized the high expectations for the company’s pending new smartphone OS launch named MeeGo. MeeGo is an OS co-developed with Intel (NASDAQ:INTC), and its success would enable higher profitability.

There could be an upside of 15% to the $12.43 Trefis price estimate for Nokia stock, if the company is able to maintain its margins at around 10% throughout the Trefis forecast period.

See our complete analysis for Nokia here.

Notes:
  1. See IDC Press Release: October 9, 2009 [↩]
  2. See IDC Press Release: September 28, 2010 [↩]
  3. See Seeking Alpha: Nokia Q3 2010 Earnings Call Transcript [↩]