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Investment Overview for Nokia (NYSE:NOK)
Below are key drivers of Nokia's value that present opportunities for upside or downside to the current Trefis price estimate for Nokia:
Emerging Markets Mobile Phones
- Nokia Mobile Phone Share in Emerging Markets: Nokia's share in emerging markets have been declining over the past few years, and we expect it to decline from around 22% in 2011 to about 16% by the end of Trefis forecast period. However, Nokia's market share decline could be much faster if the new Lumia Windows Phones aren't able to mitigate the losses being suffered on the Symbian front. There could be a downside of 6% to the Trefis price estimate if its market share declines to around 10% by the end of Trefis forecast period in 2019. However, if the Windows Phones help Nokia stage a turnaround and maintain its current market share, there could be an upside of more than 13% to the current price estimate.
- Mobile Phone EBITDA Margins: Nokia's Mobile Phone EBITDA margins have declined from 20% in 2007 to negative 2.5% in 2012. We forecast margins to decline further in the near term, before recovering to about 8% by the end of the forecast period, as its cost-cutting measures start paying off and Windows Phones gain in prominence. However, if fierce competition and emerging markets force Nokia to reduce its prices and take a further cut on margins, the margins could very well remain at depressed levels. There could be a downside of 20% to the Trefis price estimate if its margins increase to only about 4% by the end of the Trefis forecast period.
Developed Markets Mobile Phones
- Developed Markets Mobile Phone Prices: Nokia's mobile phone prices in developed markets have declined at a rapid rate in the recent past, and we expect it to decline marginally from about 70 Euros in 2012 to around 65 Euros by the end of the Trefis forecast period.
However, higher penetration of Windows Phones and a good performance by Lumia in the key U.S. market could see pricing improve going forward. There could be an upside of 5% to the Trefis price estimate if the average pricing increases to 100 Euros by the end of the Trefis forecast period.
- Market Share in Developed Markets: Nokia's share in developed markets have been declining for the past few years, but we expect it to remain mostly flat from here on, as Lumia sales pick up in the key markets of Europe and the U.S. However, Nokia's market share could decline at a very fast pace if Windows Phones fail to usurp BlackBerry as the third mobile ecosystem of choice. There could be a downside of about 10% to the Trefis price estimate if its market share declines to around 5% by the end of the Trefis forecast period.
For additional details, select a driver above or select a division from the interactive Trefis split for Nokia at the top of the page.
Finland-based Nokia is the largest mobile phone manufacturer globally. It sells mobile phones to mobile phone retailers as well as mobile phone operators such as Verizon, AT&T, and Vodafone. In addition to mobile phones, the company sells telecom infrastructure equipment to mobile phone operators through its joint venture with Siemens.
Sources of Risks
The current Trefis Price estimate for Nokia’s stock is substantially above the current market price. Following are the main sources of risks to our price estimate for Nokia's stock:
- Emerging Markets Mobile Phone Pricing: The average pricing for Nokia in the emerging markets has drastically declined from EUR 71 in 2007 to about EUR 40 in 2012. We currently expect its pricing to decline moderately to around EUR 30 by the end of the Trefis forecast period. This is because we believe that the increasing mobile phone market mix's shift towards smartphones will provide support to the pricing. However, the risk to our estimate is that increasing competition from cheaper Android alternatives will force Nokia to drop its smartphone prices at a faster rate.
- Emerging Markets Mobile Phone Margins: Nokia's margins have declined from about 20% in 2007 to about -2.5% in 2012. We currently expect the margins to start improving from this year onwards, as the company looks to push Windows Phones into lower price tiers and gain smartphone market share in the emerging markets of China and India. However, the risk to our estimate is that the fierce competition in these markets will force Nokia to continue to sell its phones at a loss, going forward
High Mobile Phone Market Share
We estimate that Nokia had a 2012 market share of about 22%, out of the 1.3 billion mobile phone units sold in the emerging markets, and 14% market share within the 500 million mobile phone market in developed economies. In comparison, Nokia Siemens Networks is expected to have 25% market share within the EURO 49 billion wireless infrastructure market, of which Nokia holds only a 50% share.
Higher Operating Margins in Nokia Siemens Networks
We estimate that Nokia's EBITDA margins in the mobile phone segment will recover from a low of -2.5% in 2012, to about 8% by the end of the forecast period. In comparison, Nokia Siemens Networks has managed to increase EBITDA margins to about 10% on the back of a restructuring that has decreased its exposure to landline and increased focus on the wireless infrastructure market. This has helped it return to operating profitability in recent quarters, and we expect the ongoing restructuring to help NSN improve margins further to about 12% by the end of the forecast period.
Nokia partnered with Microsoft to employ Windows Phone as the main operating system for its smartphones. This partnership will allow Nokia to cut expenses incurred on software development, saving R&D and SG&A costs that it currently spends on the development of its Symbian operating system. Moreover, Microsoft could help Nokia gain presence in the U.S. market through its marketing prowess. Nokia has struggled in the recent past to gain share in developed markets, most notably in the U.S.
However, by giving the operating system control to Microsoft, Nokia stands to lose the opportunity to differentiate its smartphones from the competition and risks making its smartphones a commodity.
Competitiveness of Nokia's Windows Phones in the smartphone market
It's not clear whether Nokia will be able to maintain its share of the smartphone market, where the competition is significantly tough with the likes of Apple, Samsung and HTC posing a huge threat. Nokia's bet on Windows Phone is a risky one, considering that the mobile OS has a market share in the low single digits in the smartphone market. Moreover, BlackBerry's new BB10 smartphones are out, which should help it defend its market share better and make it tougher for Windows Phones to gain prominence.
Nokia carrier relationships
Nokia faces an uphill task trying to compete against the two well-entrenched ecosystems of Apple and Android in order to create a niche for itself. However, in Windows Phone, it has a chance to offer carriers a way to counter the growing dominance of the Android and the iOS in the smartphone market.
The need for more competition in the smartphone market, not only in terms of hardware, but also software, is being increasingly felt by both customers and carriers alike. A competitive third mobile ecosystem will increase the number of choices for customers and foster innovation in the industry. More competition will also put less burden on the carriers, who are increasingly feeling the pinch of high smartphone subsidies on their margins.
A number of carriers such as AT&T, Verizon and T-Mobile in the U.S., and China Mobile in China have already jumped on to Lumia offerings, and the initial response from customers has been good. Increasing its addressable market by launching the Lumia on more carriers will be key to Nokia's turnaround hopes.
Along with carrier support, Nokia also needs to rally developers to make apps for the Windows Phone platform. Creating an ecosystem vibrant enough to counter Apple's and Google's growing presence will be essential to attract customers. The iTunes store and Google Play boast of more than 700,000 apps each, while there are only 150,000 available in the Windows Phone marketplace. Nokia is trying to bridge the gap by incentivizing app developers as well as partnering with some of the most popular ones to create exclusive content for the Lumia. In this quest, Nokia also has Microsoft's support in generating ecosystem momentum.
Expansive distribution network and scale advantages
Nokia's scale allows it to offer the best value proposition and breadth of products - ranging from EURO 25 mobile phones for the low-end emerging market subscribers to the highest-end Lumia smartphones. Nokia owns nearly 22% of the market, with China contributing the most to its market share, followed by India.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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