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We downgrade our recommendation on Nokia Corp. (NOK - Analyst Report) to Neutral ahead of its first quarter of 2013 financial results. The stock price has nearly doubled in the last year. In our view, Nokia is currently fairly valued.

Why the Downgrade?

Ever since Apple Inc.’s (AAPL - Analyst Report) iPhone hit the market, Nokia has been facing distressing times. The situation further aggravated once Google Inc. launched its Android software and several handset manufacturers adopted that operating system.

Furthermore, Android-based smartphones are flourishing in the emerging markets of China and India. Price elasticity of demand is very high in these markets due to low per capita income and the existence of several low-cost Asian phone manufacturers like Samsung, LG Electronics, HTC and ZTE. Together, these may result in lower average selling price (ASP) and less-than-expected handset sale.

Meanwhile, the stock price of Nokia has soared 116% in the last year, which may restrict above market gain anytime soon.

Risk/Reward Almost Balanced

Nevertheless, the flagship Lumia smartphone series of Nokia has received reasonable market traction in the lucrative North American region. Lumia runs on Microsoft Corp.’s (MSFT - Analyst Report) Windows Phone operating system. Further, its mid-ranged Asha series of full-touch phones also performed well in the emerging Asia-Pacific region.

We believe that “NOKIA” is still a strong brand name that can perform well if management introduces appropriate products suitable for the next generation. The company has effectively streamlined its cost structure, and consequently Nokia’s margins and cash position improved in the last reported quarter.

In the meantime, Nokia suffered severe blows from several major credit rating agencies. Standard & Poor’s Rating Services (S&P), Moody’s Investor’s Services and Fitch Ratings, all have downgraded the company’s credit ratings and have currently assigned junk category to Nokia.  

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