Neutral on Nokia

We initiate coverage for Nokia Corp. (NOK - Analyst Report) with a Neutral recommendation, which means the stock will perform in line with the broader market. Nokia commands the majority market share (35%) for mobile devices throughout the world and is way ahead of its nearest rivals, Samsung Electronics (21%) and LG Electronics (11%). Despite being the world’s largest mobile phone developer, in the high-growth smart-phone market, the company is way behind its major competitors. Nokia significantly lacks a meaningful device worth competing with Research In Motion’s (RIMM - Analyst Report) BlackBerry or Apple Inc’s (AAPL - Analyst Report) iPhone. As a result, in the lucrative North American market, Nokia holds a mere 3%-4% market share compared to a substantial 35% in 2002. 

Severe economic recession has forced telecom carriers to significantly reduce their capital expenditures and network upgrade plans throughout the world. This situation has resulted in a huge fall in the top-line of almost all the major telecom equipment manufacturers. However, we believe Nokia Siemens Network is bearing the brunt of it. Nokia Siemens Network is a 50-50 joint venture between Nokia and Siemens AG (SI - Analyst Report) and is the second largest telecom infrastructure developer of the world with 20% market share. Telecom infrastructure and related services market is likely to drop 5% -10% in 2009 compared to the previous year. Management of Nokia Siemens Network has already predicted that the company will lose more ground in the global market than estimated earlier. 

Nevertheless, in recent times, management has taken a series of measures to revamp its core businesses to regain past glory. Diversification outside the mobile phone market is essential for Nokia. In synergy with this strategy, the company recently introduced its first net-book called “Booklet 3G”. The company has introduced an innovative wireless financial service called “Nokia Money” through which consumers can access basic financial services using their mobile handset. “Nokia Money” is a 24-hour service that will enable any mobile phone user to transfer money from his/her bank account to any other person’s account by dialing the latter’s mobile phone number. 

However, we believe these positives are already reflected in the current valuation leaving little room for above market gain.

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