Financial Management News Critique on Nokia

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AB1201 Financial Management News Critique|
‘Can Windows Bring Magic Back to Nokia?’ – The Business Times| |
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Randi;Yong Jin;Qin Hong;Reuben;Calvin|
10/31/2012|
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Contents
Introduction2
Software & Hardware2
Share Price3
Liquidity & Solvency4
Profitability4
Market Efficiency4
Conclusion5
Appendix A – Share Price Figures6
Appendix B - Article7
Bibliography10

AB1201 News Critique
‘Can Windows Bring Magic Back to Nokia?’
By Group 3: Calvin Lim, Randi Ang, Reuben Chew, Chong Yong Jin & Chia Qin Hong Introduction
In today's world where smartphones have become the societal norm, manufacturers such as Apple and Samsung have seen significant success in the market, taking 53.3% of worldwide market share (IDC, 2012). In contrast, Nokia has taken a battering, with its market share falling by 50.8% (IDC, 2012) and its stocks plummeting by nearly 400% from February 2011 to October 2012 (Figure 1).

The article discusses Nokia’s current financial position and its decision in adopting Windows Phone for their smartphones. Moody’s, S&P and Fitch’s have all downgraded Nokia’s stock rating; this coupled with poor financial performance, had caused Nokia’s stock prices to fall greatly. However, based on our analysis of Nokia’s prospects, we feel that its current market value is undervalued, with investors condemning Nokia’s strategy too prematurely. Software & Hardware

The future of Nokia hinges primarily on the success of Windows Phone (Huuhtanen, 2012). Though Windows Phone 7 (WP7) has seen lacklustre adoption in the market, one should note that the newly-released WP8 had vastly improved. WP8 has none of the artificial software restrictions that plagued WP7, such as the inability to use multi-core processors (Molen, 2012) and high resolution screens (Miller, 2012). With such restrictions removed, Nokia can finally go toe-to-toe with rival brands, with innovative features of its own such as wireless charging (Nokia Corporation, 2012). Though the WP8 apps ecosystem is still substantially smaller than that of its Android and iOS rivals, this is set to change, as both WP8 and Windows 8 share the same software architecture, allowing developers to develop applications compatible across both platforms easily (Foley, 2012). Therefore, we feel that WP8 has the potential to be an industry-leading operating system and that Nokia’s current Windows Phone strategy is sustainable. Share Price

We also believe that the market has overreacted to Nokia's financial results, with Moody’s, S&P and Fitch’s downgrading its stock. Currently, Nokia’s shares are trading at an undervalued price of about $2.60 per share, with a Price-to-Sales Ratio of 0.21 and a Price-to-Book-Value ratio of 0.72 (Kelesidou, 2012). Analysts estimate Nokia’s market capitalisation at about €7bn (excluding its mapping unit and its joint venture with Siemens), which is higher than its current market value of €5.5bn. In addition, considering Nokia’s share yield of 6.9% vis-à-vis the industry average of 1.9%, Nokia’s stock may be rather appealing to investors, especially those seeking dividends (Kelesidou, 2012). Moreover, we believe Nokia can rebound from its current financial position with its upcoming WP8 smartphones. This is supported by analysts’ reports that Nokia shares may reach a target price of $5 per share, which is nearly a 100% increase from their current stock price (Thomson, 2012). On the flip side, its high dividend pay-out may limit Nokia’s long term profitability as it could invest the money in R&D instead to develop new products, especially when the firm is bleeding cash. Even though Nokia has a high quick ratio of 1.75, indicative of its high liquidity and ability to repay short-term loans (Seeking Alpha, 2012), one reason for its credit rating downgrade was due to its obligation to repay a €1.25bn note maturing in 2014. Given its current poor profitability, it would be...
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