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Nokia Corporation (ADR) (NOK) Asha Under Pressure from Samsung Rex

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Nokia Corporation (ADR) (NOK) Asha Under Pressure from Samsung Rex

Nokia faces pressure from Samsung which has some Tiger Cubs and other hedge funds smiling (see full list of funds short Nokia). Recently, Samsung Electronics Co., Ltd. (LON:BC94) announced a new series of devices. The Rex product line will seemingly go head-to-head with Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V)’s Asha series, which has been successful the last two quarters. Both the Asha and the Rex series contain a range of phones targeting the high-end of the feature phone market. They contain many Smartphone features, like full-touch screens, an advanced browser, and social media applications. The devices forgo a full operating system and generally lack 3G connectivity, and are priced from $70-$150. Analysts at BMO view this move as negative for Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V).

This is a positive move for Samsung Electronics Co., Ltd. (LON:BC94). The company has successfully captured share in high-end Smartphones with Galaxy S and Galaxy Note, and in the entry Smartphone segment with Galaxy Y and Galaxy Ace. The Rex series helps address the feature phone segment, which was still 900M devices in 2012, while also setting up a long-term upgrade path.

Analysts at BMO are concerned that the Asha series was one of the bright spots for Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V), as others were fleeing the feature phone segment. Samsung has the scale, brand, distribution and vertical integration to beat Nokia. Asha has grown to 12% of Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V)’s feature phone volumes.

BMO views this as a slight negative for QUALCOMM, Inc. (NASDAQ:QCOM) as it could slow the move to 3G at the entry level. That said, in their long-term TRDS model, BMO already assumed that 20% of global handset revenues in 2016 would be 2G devices, and TRDS still grows 15% CAGR over that time period.

Nontheless, BMO analysts make no changes at this time. They remain outperform on QUALCOMM, Inc. (NASDAQ:QCOM) and underperform on NOK.

However, analysts at Bank of America Merrill Lynch (BAML) have a slightly more bearish outlook related to the Samsung announcement. They believe that the Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) Asha product line seems to be losing momentum in key emerging market geographies whilst India has remained a bright spot. The analysts note that Nokia sold 9.7m full touch Asha models in 4Q12, one of the bright spot in the D&S division. Overall Device & Services operating margins for the feature phone division (which includes Ashas) came in at 8% in 4Q12 thanks to strong volume growth and opex cuts vs -21% margins for smartphones.

They are increasingly concerned about Nokia’s D&S margins given:

i) increasing competitive pressures from low-end Android models from China OEMs (offering dual core, 4’’ devices for as low as $130), ii) limited scalability of the Asha product line in terms of support for 3G and dual core processors, iii) Samsung’s increasing focus on full-touch feature phones, potentially forcing Nokia to reduce ASPs on the Asha range, iv) the risk that Apple launches a lower cost iPhone at $250-$300, limiting demand for Nokia’s recently launched Lumia 620 WP device ($250 ASP) and v) high-end product launches by Samsung, HTC, Sony, RIM, Huawei and LG.

BAML believes that the next catalyst for Nokia will be MWC from Feb 24 to Feb 28 where they expect new WP/Asha models as well as a potentially a tablet. BAML reiterates their underperform rating and €1.90, sum of parts price target.

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