Rising Competition Could Lower Nokia’s Valuation By Up To 10%

+13.00%
Upside
3.56
Market
4.02
Trefis
NOK: Nokia logo
NOK
Nokia

Nokia (NYSE:NOK) was once the largest mobile phone manufacturer globally. However, the company shifted its focus and restructured after selling off its handset business to Microsoft last year. Nokia currently specializes in providing wireless telecom infrastructure equipment and services as well as location services across the world through its Nokia Networks and HERE Maps business divisions, respectively. The company also licenses its patents to handset manufacturers, bringing in recurring and steady high-margin revenues through its Nokia Technologies division.

In 2014, the company’s overall revenues were about flat year-over-year (y-o-y) at €12.7 billion ($13.99 billion) owing to sluggish Nokia Networks sales which were offset by strong performances by HERE Maps and Nokia Technologies. Networks is the largest business division for Nokia, contributing about 90% of the company’s sales and about 54% of the company’s value, according to our estimates. We believe that Nokia Networks gaining share in the global wireless infrastructure market and the company improving its Networks EBITDA (Earnings Before Interest, Tax, Depreciation, Amortization) margin will be most accretive to Nokia’s value going forward. In our present valuation of the company, we forecast its wireless market share to increase from an estimated 18.3% in 2014 to almost 19% by the end of our forecast period. We also forecast its Networks EBITDA margin to remain flat at around 15-16% going forward.

However, if Nokia is unable to tackle increasing competition from bigger players such as Ericsson and Huawei or if it fails to adapt to technological advances in the wireless infrastructure space, its market share and margins are likely to be impacted, thereby significantly impacting its valuation. Nokia also faces the threat of reduced capital expenditures by mobile operators and telecom providers such as Verizon, AT&T and Sprint on account of concerns over profitability or due to their adoption of new technologies such as software-defined networking (SDN). In this article, we discuss how such scenarios could impact our $8 price estimate for Nokia.

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?

See our complete analysis for Nokia stock here

Decline In Networks EBITDA Margin (Valuation Impact -10%)

Nokia’s top line declined by 17% y-o-y in the first quarter last year as the company exited unprofitable service contracts, primarily in EMEA and Latin America. This was done as part of its big restructuring program to cut operating expenses by €1.35 billion and increase its focus on mobile broadband. The company was able to reverse much of these top line losses in the subsequent quarters owing to higher LTE spending across geographies including North America, Greater China and Asia-Pacific. In the fourth quarter last year, Nokia’s mobile broadband sales grew 13% driven by strong sales growth in North America and modest growth in Europe, Middle East and Africa.

Looking past the improvement in top line gains last year, it is important to note that the company’s sales figures show Networks’ strong dependence on developed markets for growth. The company reported y-o-y declines in Networks’ sales in emerging markets such as Greater China and Latin America in Q4 2014 and its growth in other emerging markets such as Vietnam, Myanmar and India was offset by lower network deployment in Japan. In fact, the company reported y-o-y declines in Networks’ sales in four out of six markets in full year 2014 including Europe, Latin America and Asia-Pacific. The only regions witnessing growth were North America and Greater China. Therefore, if network spending in developed markets witnesses a downtrend going forward, the company may not be able to register top line growth following its selective approach of opting for only high-margin contracts. Verizon and AT&T have hinted at slightly lower capital spending on networks this year, and this is unlikely to be offset by a likely turnaround in Europe.

Moreover, tackling rising competition in the Asia-Pacific region, especially China and India, will be tricky as the company will likely have to walk the tightrope between bagging low-margin contracts to maintain or improve market share and expanding margins by compromising on top line gains. If Nokia is unable to maintain a fine balance between the two and network spending in developed markets fails to find momentum, its Networks margins could decline going forward. If Nokia Networks’ margins decline from the current 15% to 14% by the end of our forecast period, our price estimate for Nokia could drop by about 5%. However, if margins decline further to 12%, Nokia’s price estimate could fall by over 10%.

Decline In Wireless Market Share (Valuation Impact -5%)

Although the company did fairly well last year to gain new wireless LTE contracts, it might not be able to sustain this momentum because of growing competition from global networking giants such as Ericsson and Huawei as well as other players such Alcatel-Lucent and ZTE. Nokia might also lose out if it continues to be selective in bidding for only high-margin contracts.

If the company loses out to rivals in getting lucrative mobile broadband contracts and its wireless market share drops from currently over 18% to 16% by the end of our review period, our price estimate for Nokia could decline by about 5%. On the other hand, if Nokia capitalizes on its newfound momentum and increases its market share to 22% in the next five years, our price estimate for Nokia could witness an upside of over 5%.

View Interactive Institutional Research (Powered by Trefis):

Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap
More Trefis Research