Nokia Remains Neutral - Analyst Blog

We maintain our long-term Neutral recommendation for Nokia Corp. (NOK), which means the stock, will perform mostly in line with the broader market. Currently it is a Zacks #3 Rank (Hold) stock. The company is trying a lot, including replacement of its CEO, OS upgrade, and a series of new product launches, to regain its competitive strength. Despite these, we remain concerned about the company’s future catalysts.

Nokia recently, upgraded its operating system. Nokia enriched the newly launched Symbian 3 platform with 250 new features and all its smartphones will be closely integrated with its Ovi services and applications supplied by its Navteq division. Nokia has also unveiled three new smartphones namely, E7, C7, and C6 that will join its flagship N8 smartphone.

The latest four Symbian 3-based smartphones are no doubt a huge improvement over the company’s existing devices but none of these phones contain any unique features. As a result there is a very low probability that any of these devices will outperform the market. We believe in the lucrative North American market, none of these phones will excite the consumer.

Smartphones are generally characterized by very powerful operating systems capable of supporting varieties of services and applications. The Symbian software has gradually lost charm among mobile phone users and is recognized as an out-of-date technology. Even the upgrade may not be a fitting reply from Nokia compared to the smoothness of Apple Inc’s (AAPL) iOS, Google Inc’s (GOOG) Andriod OS, and robustness of Research In Motion Ltd’s (RIMM) BlackBerry OS.

Nokia is yet to provide any update about its next-generation Linux-based MeeGo operating system. MeeGo has been jointly developed by Nokia and Intel Corp. (INTC). This OS is basically a combination of Nokia’s Meamo 5 and Intel’s Moblin. More than 6 months after the announcement of this collaboration, Nokia is yet to provide any expected launch date for its first smartphone based on MeeGo. Nokia’s earlier venture with its proprietary Linux-based Maemo 5 open-source software failed when its N900 smartphone did not find any meaningful market traction.

Nevertheless, Nokia enjoys several leading edges over its peers. Firstly, the company has established itself as one of the most cost-effective producers in the world, which enjoys significant economies of scale. Secondly, “NOKIA” itself is a very strong brand name (a household name in India and China) that can produce wonders if management can introduce appropriate products suitable for the next generation. Lastly, a strong balance sheet of nearly $10 billion of cash and investments will sustain the company’s long-term R&D activities.

Various industry researchers estimate that smartphones are likely to grow at a CAGR of 28%-30% during the next three years. This will provide an opportunity for meaningful top-line growth for Nokia.