The Opportunity and Risk for 4 Key Drivers to Nokia’s Stock Value

Over the last few years Nokia (NYSE:NOK) has struggled to gain ground in the mobile phone business, largely due to intense competitive pressure from Apple (NASDAQ:AAPL), Research in Motion (NASDAQ:RIMM), Motorola Mobility (NYSE:MMI) and Samsung. Nokia has not only lost market share, but has also suffered declining profit margins.

These are two key reasons why Nokia’s stock price has declined from 2007 levels of around $40 to below $9 today. ^[1] We currently maintain an $11.78 price estimate for Nokia stock, roughly 35% above market price.

Here we highlight 4 key drivers for Nokia’s operations, and consider the upside and downside potential that each presents for the company’s stock value.

1. Market Share in Emerging Markets:  Nokia’s market share in emerging markets (India, Brazil, and China) has been on the decline, and currently stands at around 32%.

2. Operating Margins in Emerging Markets:  Nokia has operating margins of around 11% in emerging markets.

3. Mobile Phone Pricing in Emerging Markets:  The average price for Nokia mobile phones in emerging markets is about 56 Euros.

4. Market Share in Developed Markets: Nokia’s market share in developed markets (U.S., Canada, the U.K., France, and Germany) currently stands at around 24%.

32% Downside to Trefis Price Estimate; Nokia Stock Value of $7.80

1. Faster Decline in Nokia’s Market Share in Emerging Markets (-10%):

We currently forecast that Nokia’s market share in emerging markets will decline from around 32% in 2010 to 23% by the end of our forecast period. We believe that increasing competitive pressures from local players in India and China will take share away from Nokia.

The increasing presence of Apple, RIM and Google’s Android based smartphones in the non-US markets poses another threat. There could be a downside of 10% to our price estimate for Nokia stock if its market share declines at a faster rate to reach 15% by the end of our forecast period (vs. our 23% base case estimate).

2. Faster Decline in Average Nokia Mobile Phone Pricing in Emerging Markets (-7%):

The average price of Nokia mobile phones has declined rapidly in emerging markets. Heightened competition has forced Nokia to drop prices in order to remain competitive. However, we anticipate that prices will remain more or less stable going forward as an increasing mix of higher-priced smartphones offsets further declines.

There is risk to our forecast, however, since the price of Nokia smartphones is declining as well. If Nokia is unable to control these price cuts, smartphones might prove unable to bolster average phone pricing. There could be a downside of 7% to our price estimate for Nokia if average price of its mobile phones in emerging markets declines to around 40 Euros by the end of our forecast period (vs. our base case estimate of 56 Euros).

3. Faster Decline in Nokia’s Operating Margins in Emerging Markets (-10%):

Nokia has struggled to control its operating expenses over the last few years. Operating margins have declined from 20% in 2007 to about 10% in 2010. The declining trend could persist in the near-term as Nokia continues its investment on the development of MeeGo and Symbian operating systems.

Although Nokia’s recent partnership with Microsoft allows Nokia to use Microsoft’s mobile phone operating system for its phones, the transition will take at least two years. There could be a downside of 10% to our price estimate for Nokia stock if its operating margins declines to about 4% by the end of our forecast period (vs. our 7% base case estimate).

4. Faster Decline in Nokia’s Market Share in Developed Markets (-5%):

Nokia’s market share in developed markets has dropped from 29% in 2007 to 24% in 2010. Nokia never had much presence in the U.S., as it wasn’t able to catch the eye of U.S. consumers amid the crowd of competitors. Moreover, a lack of partnerships with wireless carriers also hurt its U.S. operations. Partnerships with carriers are more important in the U.S. than any other market. There could be 5% downside to our price estimate for Nokia stock if its U.S. market share continues a sharp decline towards 10% by the end of our forecast period (vs. our base case estimate of a more moderate decline towards 16%).

45% Upside to Trefis Price Estimate; Nokia Stock Value of $17

1. Slower Decline in Nokia’s Market Share in Emerging Markets (+10%):

As mentioned above, Nokia’s market share in emerging markets is on the decline. However, Nokia is still the largest mobile phone player in the world. The company’s market share outlook will be a function of the strategy it pursues to address its recent struggles. It could, for example, employ more targeted marketing techniques to garner upside from trends like social networking and dual sim cards, both of which are gaining steam in emerging markets. There could be an upside of 10% to our price estimate for Nokia stock if market share declines moderate, putting Nokia’s share of emerging market mobile phones sales at about 28% by the end of our forecast period (vs. our 23% base case estimate).

2. Rebound in Average Nokia Mobile Phone Pricing in Emerging Markets (+10%):

Although the average price of Nokia mobile phones in emerging markets has dropped over the past few years, the silver lining is that the company actually managed to increase average phone pricing from 54 Euros in 2009 to 56 Euros in 2010. The increase was sparked by a higher mix of smartphone sales, largely due to the success of the N8 phone. ^[2]

If Nokia continues to grow its average phone pricing, there could be upside to our $11.78 price estimate for Nokia stock. We estimate potential upside of 10% to our price estimate if average emerging market phone pricing increases towards 65 Euros by the end of our forecast period (vs. our base case estimate of 56 Euros).

3. Stabilization of Nokia’s Operating Margins in Emerging Markets (+20%):

Nokia recently partnered with Microsoft to employ Windows Phone 7 as the main operating system for Nokia smartphones. The partnership will allow Nokia to cut expenses incurred on software development, saving R&D and SG&A costs that it currently spends on development of its Symbian operating system. There could be an upside of 20% to our price estimate for Nokia stock if its operating margins stabilize at around 10% (vs. our 7% base case estimate).

4. Stabilization of Nokia’s Market Share in Developed Markets (+5%):

Although Nokia has struggled to penetrate the U.S. market, there are a few positive signs on the horizon. Solid N8 smartphone sales, for one, point to an encouraging outlook. The Microsoft partnership also allows Nokia to leverage Microsoft’s marketing prowess and established U.S. presence to gain footing on this highly competitive turf. There could be an upside of 5% to our Nokia price estimate if its market share in developed markets stabilizes at around 24% (vs. our base case estimate of a steady decline towards 16%).

See our complete analysis and $11.78 price estimate for Nokia here

1. See last five year Nokia stock quotes from Google Finance [↩]
2. See SeekingAlpha: Nokia Q4 2010 earnings conference call transcript [↩]