I've been looking at NOK recently.
This is a Morningstar analysis I read the other day:
Thesis 05/31/11
Abandoning its failing Symbian and Meego platforms and partnering with Microsoft MSFT to develop handsets for Microsoft's fledgling Windows Phone 7 platform may be a longshot, but we think it is Nokia's best hope.
In our view, Nokia has three strengths: handset design, scale, and distribution. Although Microsoft hasn't had a decent share of the handset market for many years, we are impressed by what we've seen from Windows Phone 7, and think that it may have the chance to grab a niche of the high-end of the smartphone market (perhaps starting with businesses, given its Office and Exchange support) and build from there. Arguably, Windows Phone 7 has been hobbled by the lack of a competitive flagship phone.
Despite its failure to gain share at the high end of the smartphone market, Nokia still knows how to design hardware. High-end phones like the N8 and the older N97, along with Nokia's Booklet 3G netbook are marvels of hardware design, in our view. The specifications are amazing and the design is beautiful; where they fall flat is with the operating system and applications.
Another thing that Nokia brings to the table is scale, as the firm commands roughly a third of worldwide market for handset devices. Manufacturing products in 10 countries across Europe, Latin America, and Asia gives Nokia a lot of flexibility. It can react to changes in the mix of products demanded by its customers by shifting production to different facilities. It can also shift production to regions where component prices (and exchange rates) are most favorable to Nokia's cost structure, and it can quickly switch suppliers in order to get the best possible pricing.
Nokia's other key advantage, in our opinion, is its deep distribution channels in most parts of the world, including rapidly growing markets such as China and India. While it is not yet clear whether this is a real long-term advantage, Nokia has recently demonstrated a notable advantage in markets where consumers demand entry-level (less than EUR 50) phones. In such markets, the firm holds roughly 50% share and still earns decent margins. We expect sales volume in emerging markets to continue to surge, but we think emerging competition from the major Asian handset makers, along with smaller niche companies targeting specific local markets using custom-built (and sometimes even counterfeit) phones, could weigh further on prices. For this reason, we think it is critical that Nokia gain share at the high end and midrange of the handset market.
Nokia has dominated the mobile phone business for nearly as long as that market has been in existence, but more recently it has been on the defensive against Apple AAPL, RIM RIMM, and the makers of the Android handset. Its partnership with Microsoft at least gives Nokia a chance to change that dynamic; while it is a slim chance, it is still a bigger chance than Nokia had while clinging to Symbian.
Valuation
We are lowering our fair value estimate to $13 from $15. Although we had boosted our fair value estimate to $15 from $13 earlier in the year to reflect lower operating expenses, management's announcement that sales are declining more rapidly and that gross margins are contracting more sharply has led us to change our views. We now think that the company is likely to post negative free cash flows in 2011 due to a combination of lower operating margins and higher inventories.
Our five-year revenue forecast now calls for a 1.6% compound annual revenue growth rate, which is down from our prior estimate of 3%. We don't assume that the Nokia/Windows partnership sets the world on fire; we merely assume that it allows Nokia to stabilize its market share and its gross margins, and to generate marginally positive economic returns as a commodity handset vendor.
The Nokia Siemens Network and NAVTEQ businesses are immaterial to our valuation.
Risk
Now that Nokia has announced it is abandoning its own operating systems and switching to Windows Phone 7, Nokia's future is closely tied to Microsoft's future in the mobile device market. Given that Microsoft has not had a significant market share in that market in quite a while, and given the enormous head start that Android and iOS have, we think that Nokia and Microsoft face an uphill battle.
In order to reflect these conditions, and to reflect the risks of betting on a currently unreleased product line, we are raising our uncertainty rating to very high from high. Once we have better visibility into Nokia's Windows Phone portfolio, we expect to return to a high uncertainty rating.
Management & Stewardship
Nokia recently replaced CEO Oli-Pekka Kallasvuo (who held that role since 2006) with Stephen Elop. Elop, a Canadian, is the first non-Finn to take the helm at Nokia. Elop previously headed Microsoft's business division, which houses the Microsoft Office suite. Additionally, he formerly held high-level positions at Juniper, Macromedia, and Adobe. His absence of telecom and handset experience signals to us that Nokia realizes that it needs more software experience to tap the rapidly growing smartphone market.
Overview
Financial Health: Nokia is in solid financial shape. The firm is sitting on around EUR 11 billion in cash and investments versus under EUR 4 billion in debt. Despite the declining demand for its products, Nokia has continued to generate positive cash flow, but we could see free cash flows falling into negative territory in 2011.
Profile: Nokia is the world's largest manufacturer of mobile devices and a leader in mobile network equipment and software. The company's mobile phones provide consumers with experiences in voice, video, gaming, navigation, imaging, and music. Through its 50%-owned Nokia Siemens Networks joint venture, the company provides equipment and services to network operators, service providers, and corporations. |
