How Nokia Can Ring Up $9
Nokia (NYSE:NOK) must feel like the floor fell out from under it after it released poor revenue guidance for the full year 2011 in its latest earnings announcement. [1] Then the rating agencies jumped on board. Its stock has since slumped further as investors and analysts have thrown in the towel. Moreover, Nokia’s decision to scuttle its Symbian operating system in favor of Microsoft’s (NASDAQ:MSFT) Windows Phone 7 has led to doubts regarding the company’s leadership while it continues to struggle against Apple’s (NASDAQ:AAPL) iOS and Google’s (NASDAQ:GOOG) Android in the smartphone operating system market.
However all is not lost. Our near $9 price estimate for Nokia stock suggest that if the company can right its smartphone strategy and defend its margins long-term, which we highlighted is crucial in a recent note titled Nokia’s Worth $9 Given New Guidance, $12 if Turnaround Succeeds, then hope remains.
Problems Continue for Nokia
The problems for Nokia didn’t stop after it revised its outlook. Fitch and Standard & Poor downgraded its ratings on Nokia, which added insult to injury. Fitch was particularly ambitious and downgraded Nokia down by two levels, just shy of junk territory. [2] [3]
Then analysts reported that Nokia’s reign at the top of smartphone market will end this year as Samsung and Apple overtake Nokia. [4] This is more symbolic than actionable as Nokia has remained at the top of smartphone market since 1996.
…But a Turn Around is Possible
Although Nokia is bleeding market share rapidly as its profit margins head south, we still believe that the market could be over-reacting to Nokia’s short-term woes.
Nokia’s partnership with Microsoft is intended to bring product differentiation and reduce operating expenses by 1 billion Euros by 2013 from 5.65 billion Euros in 2010. This will help boost the operating margin in addition to the income it will receive from Microsoft, which has not been disclosed. We mentioned this our note Nokia’s Take on the Microsoft Deal.
Nokia also commented that it is making a conscious effort to support Symbian sales during the transition to Windows Phone platform. (see Sustained Support for Nokia’s Symbian Despite Microsoft Transition) This is a positive step from Nokia as it could avoid further losses in market share.
We highlighted recently that Nokia plans for operating margins to recover to 10% or more once the conversion to Windows is complete. Operating margins of 10% on its mobile business would have a significant impact on Nokia’s valuation even if average selling prices on mobile phones and mobile market share continue to decline as we predict.
You can modify our forecast for Nokia’s EBIT (equivalent to operating) margin for emerging markets shown above and see that there is about 60% upside to Nokia’s market price if EBIT margins reach 10% by the end of our forecast period. (We currently forecast it staying around 6% for this segment). In addition, there is another 10% of upside if similar margin improvements occur in Nokia’s EBIT margin for developed markets.
This turn around will take time of course and it all boils down to execution. Nonetheless it’s clearly a margin story and given how market has punished Nokia’s stock, value players that can stomach some volatility could take another look.
See our complete analysis for Nokia
Notes:- Nokia lowers Devices & Services second quarter 2011 outlook and updates full year 2011 outlook, May 31st 2011 [↩]
- Fitch Downgrades Ratings on Nokia Corporation-Reuters, June 7th 2011 [↩]
- Standard & Poor’s Ratings Services Lowers Ratings for Nokia Oyj, Reuters, June 9th 2011 [↩]
- Samsung, Apple to end Nokia’s smartphone reign, Reuters quoting Nomura as source, June 13th 2011 [↩]