Finnish mobile phone giant Nokia (NYSE:NOK) faces a wide range of strategic challenges going forward, including fierce competition in the high-end smartphone market, the shift in its product mix toward lower priced phones, and currency pressure resulting from Euro depreciation.
Nokia competes mainly with Apple (NASDAQ:AAPL), Research in Motion (NASDAQ:RIMM), and Motorola (NYSE:MOT) in the mobile phone market. Taking the negative factors just cited into account, the current Trefis Price estimate for Nokia’s stock is $12.33, around 39% higher than the current market price of $8.86. Our analysis follows below.
Smartphone competition
In the smartphone market, Nokia faces formidable competition from Apple, Research in Motion and devices powered by Google’s Android OS. All three competitors have worked hard to improve their mobile operating systems by constantly adding new features.
Nokia, by contrast, recently pushed the launch of its Symbian 3 operating system back to the third quarter of 2010. In a recent article, we discussed how this delay could impact Nokia’s stock price.
Price drops hurt margins
Nokia has been cutting its mobile phone prices at a rapid rate, putting pressure on margins. In April 2010, for example, Nokia introduced the C3 smartphone in emerging markets such as India, China and Brazil. The phone was priced at only 90 Euros, Nokia’s lowest-ever smartphone price.
We recently explained how falling smartphone prices could impact Nokia’s stock. And in another recent article, we noted that Nokia phones have been losing popularity in the fast-growing Indian market.
You can drag the trend-line in the chart below to create your own forecast for the average price of Nokia phones in emerging markets, and see how it impacts the company’s stock price.
Euro depreciation
Because Nokia imports most of its raw materials from Asian countries, Euro depreciation has the effect of boosting the company’s operating expenses. The Euro lost about 8% of its value since January, and is expected to remain weak until the European sovereign debt crisis subsides.
Trefis vs. the market
Despite all this bad news, we’re still relatively bullish on Nokia, at least compared to the stock market. Here’s why:
Smartphone adoption trend supports Nokia’s emerging-market pricing: The average price of Nokia phones in emerging markets has declined dramatically in recent years, from 94 euros in 2005 to 54 euros in 2009. We expect this decline to decelerate going forward, reaching 51 euros by the end of the Trefis forecast period. This is because we believe that the increasing consumer preference for smartphones will support Nokia’s pricing.
That said, there could be a 15% downside to the $12.33 Trefis price estimate for Nokia’s stock if the average emerging market phone price slides to 36 euros by the end of our forecast period.
Margin declines could be worse: Nokia’s profit margins slid from about 20% in 2007 to 12.5% in 2009. We currently expect overall margin declines to continue at a measured pace, reaching 7.5% by the end of the Trefis forecast period. But if margins decline faster than we expect, reaching the 4% level by 2016, there could be as much as a 25% downside to the $12.33 Trefis price estimate for Nokia’s stock.
You can see the complete $12.33 Trefis Price estimate for Nokia’s stock here.
