Nokia Upgraded to Neutral

We are upgrading our recommendation on Nokia Corp. (NOK - Analyst Report) to Neutral, solely based on its extremely low current valuation, which plunged nearly 66% last year. We believe at this stage, further downslide of the stock price is a remote possibility. Meanwhile, Nokia remains in dire strait as management has recently forecasted worse-than-expected financial results for the ensuing second quarter of 2012 and opted for another 10,000 headcount reduction.

Nokia is currently in a transition phase from its legacy Symbian software based mobile feature phones to Windows software based smartphones and tablets. We believe the main reason for the company to incur losses is a serious concern relating to the company’s smartphone segment. Though Lumia smartphones are much improved offerings from Nokia, we are not very sure whether this device will be able to gain market share from Apple Inc.’s (AAPL - Analyst Report) iPhone or Google Inc. (GOOG - Analyst Report) developed Android based smartphones. Continuous loss of global market share due to lack of popular operating system like Android or iOS is hurting its profitability.

For the first time in last 14 years, Nokia lost its global market leadership position in the overall mobile phone industry to Samsung. Almost a year ago, Nokia lost its crowning glory in the smartphone segment. We remain very much skeptical regarding the success of the Nokia-Microsoft Corp. (MSFT - Analyst Report) mobile venture. All the three major credit rating agencies of the world, e.g., S&P, Moody’s, and Fitch have downgraded Nokia to junk category with a negative outlook.

Nokia has decided to reduce its headcount further by 10,000 by the end of 2013. The cost-cutting measures will result into $1.26 billion of restructuring charges. However, the company will be able to save approximately $2 per annum in its core Devices & Services segment. Moreover, Nokia has decided to sell a majority stake of its luxury mobile unit Vertu to private equity firm EQT VI.