Nokia Gains 22% Even As It Bleeds Share Outside Of Emerging Markets

Trends aren't good

Nokia, which competes with Apple, Research in Motion and Motorola in the mobile phone market, has lost share in developed markets like the U.S. and Europe over the past few years.

We believe the market share loss was caused by insufficient focus on customer needs, delays in introducing new operating systems, and incompatibility with networks of telecom operators. We expect Nokia’s share in developed markets to fall further over the coming years.

Despite weakness in the company’s developed market growth prospects, we maintain a price estimate of $12.44 for Nokia, roughly 22% ahead of market price. Nokia generates an estimated 53% of its value from emerging markets (vs. 17% from developed markets), limiting the impact of downside to its developed market operations.

Insufficient Customer Focus

Nokia has struggled to match the evolving needs of U.S. and European consumers, as its mobile phones have often fallen short of customers’ customization preferences. In addition, Nokia was late in launching touch screen phones, allowing its competitors to take advantage of a head start into this lucrative market.

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Nokia’s phone design has also drawn criticism. Demand for thin and lightweight phones has been on the rise over the past few years, but Nokia was unable to successfully implement these features in its phone design.

Operating System Release Delays

Symbian 3, Nokia’s enhanced version of mobile operating system (OS) due for launch in Q2 of 2010 was delayed by three months. (1) The Symbian 3 launch represented a real opportunity for Nokia to compete with leading phones like the iPhone and Blackberry, as it had highlighted improved features like multi-touch, fast flip scrolling and free navigation software. Unfortunately, these delays only hampered Nokia’s brand image.

We’ve previously written that Nokia’s N8 smartphone, its first to run Symbian 3, will likely produce minimal upside to our base market share projections. (Can Nokia’s N8 Smartphone Boost Market Share)

More recently, Nokia also announced the delay of its new E7 smartphone, which will now debut in early 2011. (2)

GSM Struggles

Having seen success in the emerging markets with its GSM based mobile phones, Nokia tried to repeat the effort in developed markets as well. However, the majority of telecom operators (Verizon, Sprint) in the US use the CDMA network, and hence Nokia’s GSM-based phones were not compatible with these telecom operators.

Nokia’s Share to Decline in Developed Markets

We estimate that developed markets constitute around 17% of the $12.44 Trefis price estimate for Nokia’s stock. We believe that Nokia will continue to struggle to stand its ground amid the onslaught of competitors in these markets, and project a decline in the company’s market share from around 27% in 2009 to under 20% by the end of the Trefis forecast period.

You can modify our forecast above to see how Nokia’s stock value would be affected if its share in the developed markets were to revive.

You can see the complete $12.44 Trefis Price estimate for Nokia’s stock here.

Notes:

1) The Wall Street Journal: After Delay, Nokia Ships New Smartphone

2)?The Wall Street Journal: Nokia Delays E7 Smartphone Release

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Trefis members constitute more than tens of thousands of users of the Trefis platform, inclusive of investors, financial analysts, and business professionals who use the Trefis platform to create their own models and price estimates.

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Nokia Has Wafer-Thin Margins But The Stock Is Still Worth Almost $13

Nokia cleans up in emerging markets

Rising competition in the handset market, lower phone prices, and rising R&D expenses have chipped away Nokia’s profit margins in recent years. Nokia competes with Research in Motion, Apple, Motorola, Samsung and Google’s Android devices in the smartphone segment and a host of players in the basic handset business.

From 2007 to 2009, Nokia’s EBIT margin (a measure for profitability) for mobile phones declined from 20% to around 13% on a firm wide basis. ^[] We expect this trend to continue over our forecast period, slipping to around 7.5% by 2016. However several items might turn margins around including new initiatives like its online app store called Ovi, an upgraded operating system and its push into smartphones.

The average Trefis member forecast suggests that emerging market profit margins will remain flat rather than decline steadily as we forecast, implying around 25% upside to our price estimate of $12.44 for Nokia’s stock, which is about 21% above the current market price of $10.31. We also pose the question of the corresponding impact on unit sales from its smartphone strategy below.

Symbian, Ovi Help Smartphone Sales

If Nokia can deliver on its improved Symbian operating system and the Ovi app store, we believe this will facilitate Nokia’ already strong push into the smartphone market. By upgrading its OS and providing more apps, games and services, this attracts new smartphone customers and help retains current ones.

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According to IDC research, Nokia’s smartphones shipments grew 61% year-on-year in Q3 of 2010. ^[] In our earlier article, we explained how emerging markets account for a major portion of Nokia’s smartphone sales, and how increasing sales can create potential upside to its margins.

By looking at the forecasts among Trefis users, a consensus is forming that Nokia’s emerging market profit margins will be supported by a greater mix of smartphone sales. Some think this implies that Nokia will lose market share on the low-end segment and erode its handset sales though we have not seen data to support this.

Above, the average forecast of Trefis members for mobile phones EBIT margin for emerging markets indicates that margins will stay flat at around 12.5%, compared to the baseline Trefis estimate of a decrease from 10.5% in 2010 to 7.5% during the same period. This translates to around 25% upside to our price estimate.

We realize that there will likely be an impact on unit sales as well and want to see more data before adjusting our estimates.

We include the chart below so that the reader can adjust market share data for emerging markets to see how this factor alone impacts our price estimates. To see the combined impact – higher EBIT margins and adjusted unit sales – please visit our site below.

Our complete analysis for Nokia’s stock is here.

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Nokia Has A Shot At Becoming At Least Marginally Relevant In Smartphones

It's still alive and kicking

Nokia’s mobile phone share in developed markets has declined consistently from around 30% in 2005 to around 26.7% in 2009. [1] This decline can be attributed to Nokia’s inability to attract U.S. consumers, a delay in its Symbian operating system launch and its strained position in the competitive smartphone market versus more established players like Research in Motion, Apple and new emerging players like Google.

We expect Nokia’s negative share trend to continue in the future. However, a change in business strategy involving better product and marketing initiatives for Ovi, Nokia’s equivalent of Apple’s iTunes and App Store, could slow the company’s market share decline.

We currently have a Trefis price estimate of $12.33 for Nokia’s stock, about 16% above the current market price of $10.60.

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Slower in the Smartphone Race

Among Nokia’s competitors, Apple, RIM, and Motorola have earned significant brand equity over the past few years while Nokia’s smartphone market share dipped from around 52% in 2007 to 40% in 2009. [2] However, recent data released by iSuppli showed an encouraging uptick in Nokia’s global smartphone shipments market share from 38.5% in Q1 to 39.7% in Q2 while Apple and RIM’s market share decreased, perhaps signaling a shift in its fortunes. [3]

To complement Nokia’s smartphone push, we believe Ovi might provide fresh life to Nokia and could plug the slide in market share if it takes off. Ovi gives consumers online access to gaming, music, navigation, and other apps, similar to Apple’s App Store. We believe that Ovi signals a shift in Nokia’s strategy from being primarily a handset manufacturer to a company offering various entertainment services under one platform, a page out of Apple’s playbook.

With newer smartphones and more services available, two growing requirements for today’s developed market users, Nokia could turn around its developed market share.

The average of Trefis member forecasts for market share in developed markets indicates a decrease from 26.1% in 2010 to 23.4% by 2016, compared to the baseline Trefis estimate of a decrease from 25.7 % in 2010 to 19.7 % by the end of the Trefis forecast period. The member estimates imply an upside of 2% to the Trefis price estimate for Nokia’s stock.

You can drag the forecast trend line above to express your own views.

Our complete analysis for Nokia’s stock is here.

Notes:

1. Nokia’s Share of Developed Markets is calculated as: Nokia Unit Volume/Industry Unit Volume. Nokia provides industry unit volume and Nokia unit volume data by geography in its annual 20-F filings. We aggregated that information into Developed Markets (North America and Europe) and Emerging Markets (China, Latin America, the Middle East, Africa, and Asia Pacific).

2. Reported in 2009 20-F

3. iSuppli Press Release, October 12, 2010

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The India market share loss could cost Nokia 20 %

IDC recently came out with a report on market share of Nokia in India indicating part of Nokia, which mobile phone handsets has decreased from 54% in 2009 to 36.3% in the second quarter of 2010. Nokia, however, refute these claims arguing that IDC do not count shipments from its plant in Chennai ^[]. The India is the second largest market after China for Nokia in emerging markets. If the IDC claims are true, and continues this steep decline in market share, it may be a disadvantage for the Trefis price estimate $12.33 for Nokia stock.

Potential drawbacks of Nokia stock

Has a few months, we discussed how Nokia is slowly losing its dominant position in the Indian market of mobile phones.Article of IDC not only reinforces this point, but also indicates that market share declines are much larger that had originally been thought.Our estimates indicate that Nokia sold approximately 60 million phones in India in 2009, a total of 300 million sold in markets émergents.Cela implies that about 20% of Nokia emerging market sales come from single India, which makes it a major enterprise .Rapport IDC India sales declining market suggest that share of Nokia on the larger emerging markets may also refuse to usefully.

We believe that the market shares of Nokia in emerging markets (India, Brazil and China) will decrease by 40% in 2009 and 34% at the end of the forecast period Trefis.

If, however, the market share decreases at a faster rate to 20 per cent by 2016 to 34% that we currently forecast, it could a 20% reduction for the Trefis price estimate $12.33 for Nokia stock.

Factors behind this rapid decline

Nokia is in competition with Apple and Research in motion market high-end mobile phones and with LG, Samsung and Sony telephony market mobile value.However, the emergence of local actors in India asked a more difficult competitive threat to enterprises of Nokia.Nokia has been losing a part of new Indian mobile companies such as Micromax and Spice Mobile Karbonn mobile because she neglected popular trends in the Indian market of mobile phones.Nokia has also been slow to identify popular features such as dual SIM card phones and networking sociales.Dans applications simultaneously, competitors have invested massively in advertising campaigns that have helped to grow rapidly.

Enough dual SIM cards:In recent years, many Indian consumers have begun to maintain multiple accounts mobiles.Les reasons include costs and the need for different phone numbers for official purposes and personnelles.En result, combined with dual SIM card capacity have become very popular.Nokia has shifted its competitors together card double SIM market handsets.

Limited social networking capability:Aboriginal youth were early adopters and enthusiasts of social networks mobile.Nokia was late to enter the arena of networking social.En revenge, rival Samsung has increased its share of market in large part due to the success of its popular Corby phones which include extensive social networking functionality.

You can see the full $12.33 Trefis Price estimate of Nokia stock here.

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