How Nokia’s Stock Price Could Double
Nokia’s (NYSE:NOK) stock price has slumped from near $40 in 2007 to around $10 recently. While we realize that comparisons with 2007 are not entirely fair, we still find it worthwhile to evaluate what drivers could lead to a significant move higher in Nokia’s stock price. The answer lies in Nokia’s emerging markets advantage and smartphone strategy.
Nokia remains the dominant global handset vendor given its high exposure to emerging markets, which includes the Middle East & Africa, Asia-Pacific, Greater China and Latin America. With this global footprint and given its smartphone push, we see a scenario where profit margins could tick higher.
Our price estimate of $12.44 compares to a market price of around $10.50, and our estimate could nearly double to $24.50 if Nokia can improve its profit margins to 20% in emerging markets (+$9.00) and 22% in developed markets (+$3.00) by 2016.
+$9 Emerging Market Advantage
Nokia is still the undisputed handset vendor globally. Recent IDC data on Q3 shipments reported that Nokia holds 32% global market share, 11 percentage points ahead of next placed Samsung, [1] giving it an edge in distribution versus peers like Samsung which supports Google’s (NASDAQ:GOOG) Android OS in many of its smartphones, and other established smartphone players like RIM (NASDAQ:RIMM), Motorola (NASDAQ:MOT) and Apple (NADAQ:AAPL).
IDC expects the smartphone segment to grow +55% for 2010. In Q3, Nokia’s smartphones shipments grew 61% year-on-year showing its focus on this segment. [2] We believe that a large share of these smartphones is destined for emerging markets, implying potential upside potential for profit margins.
We currently estimate that emerging markets account for 53% of Nokia’s value based on expectations of a gradual decline in emerging markets EBIT margins (a measure of profitability). However, if EBIT margins can reverse on the higher mix of smartphones and reach 20% by 2016, this adds +$9 to our price estimate.
+$3 Developed Markets
While developed markets do not possess the same growth rates as its developing peers, these markets are experiencing the same trends toward smartphones. In addition, these markets also carry a higher mix of post-paid subscribers, which tend to carry higher average revenue per user. Both could improve profit margins.
In addition, we could see Nokia’s Ovi launch stimulate demand for the smartphone segment. This platform aims to provide apps and content to smartphones users. We wrote about Ovi in a recent Nokia article. [3]
With a higher smartphone mix and additional services to attract customers, this could help turn around profit margins in developed markets. If developed market EBIT margins can reach 22% by 2016, this adds +$3 to our price estimate.
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