We upgrade our recommendation for Nokia Corp. (NOK) to Neutral based on its attractive current valuation. The stock currently has Zacks #3 (Hold) Rank. The company is facing serious problems in its core Devices and Services segment. We continue to believe that Nokia’s inability in the high-margin lucrative smartphone market will put more pressure on its earnings going forward. Globally, customer choice is quickly shifting toward smartphones from basic mobile phones.
 
At the same time, we also notice that the stock price has fallen by nearly 42% in the last three months and is presently at the low-end of its 52-week price range. With respect to several valuation metrics, Nokia is now trading significantly below the S&P 500 average and its peers. We do not expect a further slide in the stock price at this stage and believe Nokia will perform mostly in line with the broader market.
 
Nokia commands a strong brand image in the emerging markets of South East Asia, the Middle East, Africa, Latin America, and Eastern Europe. In the smartphone market, Nokia’s global market share was 39% in the first quarter 2010 compared with 20% for Research In Motion Ltd. (RIMM) and 16.5% for Apple Inc. (AAPL).
 
Various industry researchers estimated that smartphones are likely to grow at a CAGR of 28%–30% during the next three years. Enormous growth of smartphones in several emerging markets may help the company to recoup some of its losses in the North American markets.
 
Of late, Nokia has taken measures to revamp its core businesses. Management announced that all its future smartphones will use the Linux-based MeeGo operating system and the Symbian 3 software will be used for low-end phones mainly targeting the retail consumer segment in the emerging markets. Management has also taken several steps such as focusing on LTE and competitive bid pricing, to improve the financials of Nokia Siemens Network, a 50-50 joint venture between Nokia and Siemens AG (SI).
Read the full analyst report on “NOK”
Read the full analyst report on “RIMM”
Read the full analyst report on “AAPL”
Read the full analyst report on “SI”
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