Nokia Has A $4.50 Fair Value Due To Lumia And NSN’s Prospects

Nokia (NYSE:NOK) may no longer be the world’s largest mobile phone manufacturer, having relinquished that throne to Samsung whose handset sales outpaced Nokia’s globally at the start of the year. But Nokia still commands a market share of more than 20% of the global handset market, with a dominant position in the emerging markets.

While that figure is still quite high for a single company, its market share has been falling over the past few years. Only three years back when Nokia was at its peak, it used to command a market share of nearly 40%. But with the advent of smartphones such as Apple’s (NASDAQ:AAPL)  iPhone and Research in Motion’s (NASDAQ:RIMM) Blackberry, as well as the emergence of strong Asian rivals such as Samsung (PINK:SSNLF), HTC and ZTE, Nokia’s fortunes took a beating.

See our complete analysis for Nokia stock here

A big reason why Nokia failed to stand up to the emerging competition was that it couldn’t come up with a software platform that could address the changing needs of its customers. While competitors such as Apple, Samsung and HTC either developed a smartphone OS of their own or jumped on an open source software developed by Google, Nokia chose to stick largely with its older Symbian platform. However, now that Nokia has moved on to Windows Phone platform and the Lumia smartphones have sold decently well (sales have doubled each quarter to about 4 million in Q2), we can imagine Nokia gradually creating a niche for itself in the smartphone market. The Lumia smartphones could also benefit from Nokia’s relatively strong position in emerging markets such as China.

In addition, the future prospects of Nokia Siemens Networks, which is a 50:50 joint-venture between Nokia and Siemens, look good. The division is gradually returning to profitability on the back of heavy restructuring and job cuts, and accounts for close to a quarter of Nokia’s stock value, as per our estimates. We have a $4.50 price estimate for Nokia’s stock, about 70% ahead of the current market price.

Microsoft and carrier partnerships are key to Nokia’s smartphone plans

Nokia’s exclusive partnership with Microsoft came at an interesting time last year. The company was working on multiple smartphone platforms, namely Symbian, Maemo, Meego and Meltemi (rumored) at the time. But then it decided to shelve the development of most of these platforms and instead focus solely on the Windows Platform. By doing so, Nokia effectively decided to become a hardware player and save on software R&D costs while drawing $250 million in platform support payments from Microsoft every quarter. At the same time, collaborating closely with Microsoft gave Nokia not only a strong smartphone OS and hence more of a chance to stake a claim on the lucrative smartphone market, but also a deep-pocketed partner that was as desperate for a bigger share of the market.

With the Lumia Windows Phone, Nokia is now able to offer carriers a competitive third mobile ecosystem to promote, thereby increasing competition in the smartphone industry. More competition puts lesser burden on the carriers who are increasingly feeling the pinch of smartphone subsidies on their margins. It is no wonder therefore that wireless carriers in both the U.S. and China have jumped on Nokia’s latest offerings to counter the growing dominance of Android and iOS in both these markets.

In the U.S., T-Mobile and AT&T were the early Lumia backers with AT&T affording the phone a “hero” status at its stores and making it the exclusive free phone for all AT&T employees to generate awareness. The Lumia therefore not only benefited from a greater marketing push of its founding partners but also two of the country’s biggest national carriers. This ensured that the Lumia 900 was among the top three best-selling handsets at AT&T until July, a period of four months since launch. ^[1] With the launch of Lumia Windows 8 Phone closing in, we expect Verizon to jump on board as well. (see Nokia Close To A Verizon Deal As Lumia WP8 Launch Nears)

Further, Nokia is pushing Lumia hard in China as well, which is expected to supplant the U.S. as the world’s biggest smartphone market by the end of the year. Nokia has already launched the Lumia 800C and announced the cheaper Lumia 610 on China Telecom, and is rumored to have roped in China Mobile as well for its WP8 plans. 3G penetration is still at a lowly 18% in China, and the carriers there are actively trying to transition their huge 2G base to 3G. With a billion strong mobile subscriber base and growing demand for 3G services, China presents Nokia with a huge opportunity to create a smartphone niche for itself.

Where carrier partnerships have not been hard to come by for Nokia, getting people to warm up to the Windows ecosystem has proved increasingly tough considering how well-entrenched Android and iOS have become as mobile ecosystems. This is where WP8 offers both Nokia and Microsoft their best chance to find a place in the growing mobile market. While building Windows 8 and WP8, Microsoft ensured that both share the same kernel and therefore inherit the same rich feature set that has made Windows a household name in the PC industry. This will help integrate the two platforms closely, thereby making apps developed for either platform easier to port. Having a huge user base for its Windows PC platform will therefore help Microsoft generate significant support for the new integrated Windows8/WP8 user experience, driving the sales of Windows Phones in general and the Lumia in particular.

NSN could be the dark horse

While Nokia is trying to get its mobile division in order, its joint venture with Siemens seems to be turning around pretty well. Nokia Siemens Networks (NSN), which is vying with Huawei for the 2nd position in the wireless infrastructure market, returned to NON-IFRS operating profitability in Q2 2012 as the company’s cost-cutting initiatives took hold. NSN had announced in late 2011 a major restructuring initiative that would cut 17000 jobs and help it achieve savings of 1 billion Euros by the end of 2013. As a result, NSN has now generated cash for the past three quarters. The restructuring will also help NSN sell off non-core assets and focus better on wireless broadband which has strong long-term growth trends as opposed to the relatively stagnant landline market.

With 4G LTE deployments ramping up in many parts of the world, NSN will also benefit from the 3G to 4G wireless shift in the coming years. Of particular interest to NSN will be TD-LTE, a variant of 4G technology that is being used in many emerging markets such as China and India. NSN  is the current TD-LTE market leader with five out of a total of 11 commercially deployed TD-LTE networks using NSN’s gear. ^[2] Both China’s and India’s biggest wireless operators, China Mobile and Bharti Airtel, have chosen NSN to deploy their respective LTE networks. With NSN’s future prospects looking brighter than ever before, Nokia will be banking on the division to generate cash and help it tide over the tough Windows Phone transition.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Apple’s iPhone 4S is no longer the top-selling smartphone in the U.S., BGR.com, September 4th, 2012 [↩]
2. Nokia Siemens Networks sets TD-LTE speed record, goes beyond 4G, NSN Press Release, September 18th, 2012 [↩]