Nokia Lumia 520 Nokia Lumia 720

Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) is currently down 2.31% to $3.60 in today’s trading session. Tiger Cubs are making millions in the process (See all hedge funds shorting Nokia). Nokia faces many challenges and Goldman Sachs issued a new report yesterday cutting the price target for the Finish  based firm. Why the downgrade for Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V)?

What’s changed

  1. The launch of Lumia 720/520 smartphones does bring Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V)’s Win Phone products to lower prices, but features remain relatively undifferentiated, in Goldman’s opinion. Nokia continues to lack a flagship product that can challenge Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) or Apple Inc. (NASDAQ:AAPL).
  2. Goldman Sachs’ recent mobile survey results are supportive of their conservative investment thesis, as Microsoft Corporation (NASDAQ:MSFT) was a relative laggard in terms of retention (vs. Android and Apple Inc. (NASDAQ:AAPL)’s iOS) as only around 41% of Win Phone owners chose to buy another Win-based device over the last six months. Notably, their latest survey findings suggest that price consideration is less of a reason to “defect” than what Goldman concluded in their prior survey, making it incrementally harder for Nokia to attempt to capture share with lower ASPs.
  3. Microsoft Corporation (NASDAQ:MSFT)’s ability to reestablish itself as a meaningful participant in the consumer compute landscape continues to be in question, in Goldman’s view, and on top of that Nokia remains only one of many credible providers operating Win Phone OS.

Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V)’s 20-F additionally acted as a reminder that Microsoft Corporation (NASDAQ:MSFT) may focus more on their own devices, potentially at the expense of other manufacturers that operate on the Win Phone platform.

Implications

Goldman has lowered their sales estimates by 4%/5%/2% for 2013/14/15, driven by lower smartphone forecasts (to 29mn/49mn/62mn). Their EBITDA forecasts fall by 9%/10% in 2013/14, implying low single-digit EBIT margins in 2013/14/15.

Valuation

Goldman’s 12-month price target falls to €2.8 (from €3.25; ADR to $3.5 from $4.1), based on an unchanged target multiple of 4x 2014E EV/EBITDA (equating to 0.4x EV/Sales), given lower EBITDA. They continue to believe a low multiple is justified given structural market share challenges in Smartphones and secular risks to Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V)’s 2G Feature Phone portfolio.