Lumia And China Are Key To Nokia’s Future; $6.50 Fair Value

March 21st, 2012 by Trefis Team
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Nokia (NYSE:NOK) is the world’s largest mobile phone manufacturer with close to a quarter of the global mobile phone market. While that figure is still quite high for a single company, its market share has been falling over the last 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 competitors such as Samsung, Huawei and ZTE in emerging markets, Nokia’s fortunes took a downturn.

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 Apple, Samsung and HTC either developed a smartphone OS of their own or jumped on an open source mobile software developed by Google especially for smartphones, Nokia chose to stick to its older Symbian platform. The bet proved costly for Nokia as its Symbian smartphones fared poorly in the marketplace and Nokia lost significant market share.

Microsoft and carrier partnerships key to developed markets

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At the start of 2011, Nokia took a huge step when it decided to move its smartphone portfolio entirely to Microsoft’s Windows Phone platform. Not only did the partnership give Nokia a better smartphone OS and hence more of a chance to stake a claim on the lucrative smartphone market, it also gave it a deep-pocketed partner that was as desperate for a bigger share of the market. By the end of 2011, we saw Nokia’s first Windows Phones emerge in Europe and certain emerging markets, christened Lumia.

Fast forward to 2012, and Lumia has been in the market for more than a quarter now. For the less than two months that the Lumia was available in 2011, it did well, selling around a million units.

At the start of 2012, Nokia also launched the first Lumia smartphone in the U.S. on the country’s fourth largest carrier, T-Mobile. A month back, it was reportedly the third best selling smartphone on the carrier. [1] Pre-orders for the Lumia 900, which has been designed especially for North American markets, has already started in Canada where Nokia has partnered with Rogers. [2]

With more carrier partnerships on the way such as another one with AT&T announced at the CES, we believe that Nokia’s prospects in the developed markets are looking much brighter than before. (see Nokia’s New Year Resolution: Spread Carrier Love)

Unwavering focus on emerging markets

But developed markets contribute only about 13% to Nokia’s overall value. While still very lucrative for the higher margins that these markets afford, a significant portion of Nokia’s total value still comes from the lower-margin emerging markets where Nokia has a higher market share. It is therefore a good sign that Nokia has also been making  plans for addressing its falling market share in these markets too.

Recently, Nokia announced that it will be launching the Lumia in Chinese markets by March 28th, having secured approvals for its device from Chinese network regulators. [3] All the three Chinese national carriers, China Mobile, China Unicom and China Telecom, will reportedly be able to sell the Lumia handsets soon. With a billion strong mobile subscriber base and growing demand for 3G services, China presents a huge opportunity for handset makers. Market research firm, IDC expects China to overtake U.S. as the largest smartphone market by the year-end.

Nokia also made an important acquisition at the start of 2012 that will help bolster its emerging market prospects in the coming years. It acquired a Norway-based mobile OS developer, Smarterphone AS, whose proprietary software platform claims to enrich the user experience on feature phones by providing a highly advanced functionality on very moderate hardware. (see Nokia Buys Smarterphone AS; Positive for Emerging Market Penetration ) This will help Nokia replace the old S40 software on its feature phones, make its low-end phones smarter and address the yet potentially unmet demand for quasi-smartphones that have already started making an appearance in the Chinese markets. (see Chinese Telcos Look to Boost Margins With Cheaper Smartphones)

We see Nokia’s recent initiatives help it stem the emerging market share loss in the coming years. Since emerging markets account for close to 40% of Nokia’s overall value, this should go a long way in driving the company’s perceived value higher. Our price estimate for Nokia’s stock is $6.50, about 20% ahead of market price.

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seen its market share in developing markets fall from what was once more than 70% in 2007 to an expected close to 50% in 2011. We have also seen its market share in developed markets fall in tandem, but emerging markets, at 35%, contribute the most to our $6.84 price estimate for Nokia, as compared to 14% by developed markets.
Notes:
  1. The T-Mobile Lumia 710 is “exceeding expectations” according to Elop, wpcentral, February 29th, 2012 [↩]
  2. Nokia Lumia 900 pre-orders start in Canada, PhoneArena, March 19th, 2012 [↩]
  3. Nokia’s 1 billion opportunity: A China Lumia launch, March 16th, 2012 [↩]