By Sheena Lee
“The decision to enter into a strategic relationship with Microsoft is well characterised as an important strategic fix,” Nokia CEO Stephen Elop told the Financial Times. “It is something we can rapidly execute on.” But the street is not convinced that Nokia can turn around its mobile phone business with the partnership and many rushed to downgrade the stock.
The median price based on 17 analysts tracked by Alacra Pulse who have updated their targets since the announcement is $9.45, down from $12.30 in our November prognosis. The mean target is $9.84, not much higher than Tuesday’s closing price of $9.07. Only five of these analysts have a positive rating; seven are negative and five are neutral. Several other analysts who do have price targets also lowered their ratings.
Current 12-month price targets of selected sell-side and independent analysts. (Click to enlarge.)
J.P. Morgan analyst Rod Hall cut his rating on the stock to Sell from Buy with a price target of $7. As recently as December, Hall had a target of €10, or $13.50. “As we leave 2010 in the rearview mirror it is now time to look forward as the company embarks on a new strategy with a new CEO. We are concerned that short term execution difficulty represents high risk to 2011 and possibly 2012 earnings.”
HSBC Securities analyst Richard Dineen reduced his rating to Underweight from Neutral and lowered his target to €6.50 ($8.78). “We understand Nokia’s thinking behind its decision to adopt Microsoft’s Windows Phone as its primary smartphone platform over Google Android – fearing rapid commoditization were it to choose Android instead,” he wote. “Nonetheless, we believe that this course of action is too little and too long-dated to successfully turnaround Nokia’s fortunes in the smartphone space.”
Matthew Hoffman of Cowen & Co. said Nokia also seems to be ignoring the fast-growing tablet space that is drawing in other mobile-device makers such as Motorola, Samsung and LG. “Nokia’s focus on Windows Phone 7 smartphones appears to miss the opportunity to grab share in the ‘next’ big market, tablets,” said Hoffman, who lowered the stock to Underperform from Neutral.
“My first thought is to sell Nokia stock because Nokia has just given themselves away for free and Google and Apple are laughing all the way to a duopoly,” said Neil Campling, an analyst at Aviate Global LLP in London.
Sanford C. Bernstein analyst Pierre Ferragu said he’s worried about the time it will require to put the new system into effect. “When you are facing a fire, you need to move quickly because it expands fast…This partnership will take time to implement and deliver phones. This is what may kill Nokia.”
“We expect Nokia’s smartphone market share to collapse as developers abandon Symbian support following Elop’s dismissive comments about Symbian and Qt software platforms,” said Tero Kuittinen, analyst at MKM Partners, who has an $8 target and a Neutral rating.
“We have lowered our Nokia smartphone forecasts for 2011 by 7 percent and we are concerned by both the lack of preparation the industry/employees appear to have had,” said UBS analyst Gareth Jenkins, who cut the firm’s price target to €7.3 ($9.86) from €8. Deutsche Bank also lowered its target to €6.5 ($8.78) from €8.50, and Credit Suisse to €6 ($8.10) from €7.
“Nokia is…handing responsibility for its user interface to Microsoft, which has a poor track record in this area, and giving access to its innovations to key rivals,” said Stuart Jeffrey at Nomura in a research note. ABG Sundal Collier cut its rating on the mobile-phone maker to Hold from Buy. Swedbank lowered its recommendation to Sell from Buy.
But some said although the partnership may look like a bad move in the short-term for Nokia, it could help the mobile phone maker in the longer term as it battles competition from Apple (AAPL) and Google (GOOG).
Blaine Carroll at Hudson Securities lowered his target to $11 from $12 but maintained a Buy rating. ”Nokia is the leading provider of wireless devices with a worldwide market share of 30%+ and strong brand recognition in the International markets. Its collaboration with Microsoft should benefit the company in the longer term,” he wrote in a note to clients.
Also still cautiously bullish is Santander’s Carlos Treviño Peinador who reiterated a Buy rating while lowering his target to a high of €11 ($14.85) from €13.20. We believe the stock still has value, but more visibility is required to unlock it . . . until Nokia provides more information on the transition period, cost savings and the product roadmap, this value is unlikely to be unlocked.”
“I believe Nokia’s smartphone sales will go down by some 20 percent for the rest of the year. They will lose a lot of market share,” said Nordea analyst Sami Sarkamies. But the alliance could prove to be successful in long term, added Sarkamies.
“If Nokia wanted to leave mobile operating system development to another company, IHS thinks Google Inc and its Android software would have been a better choice,” Jonathan Cassell, an analyst with IHS iSuppli, wrote in a Feb 14 research note.
Some shareholders agree: An unnamed “group of nine young Nokia shareholders” who have also been employees at some point released an open letter to the company’s other shareholders and institutional investors that, in a nutshell, said that the Microsoft deal is a bad one for Nokia and that CEO Stephen Elop should be replaced.
Sources: Alacra Pulse, Financial Times, Forbes, Market Watch, San Francisco Gate, Reuters, Benzinga, Bloomberg, Techmeme, ZDNet.