Fitch Ratings Downgrade Nokia - Analyst Blog

Nokia Corp. (NOK), the struggling mobile phone manufacturer, has recently received a major blow as the rating firm Fitch Ratings has downgraded its debt rating and provided a negative outlook. Fitch downgraded Nokia's long-term Issuer Default Rating (IDR) and senior unsecured rating by one notch to ‘BBB+' from ‘A-'. However, the existing ‘F2' rating for the short-term IDR remains. Importantly, Fitch downgraded Nokia's long-term IDR outlook to negative indicating the possibility of another rating downgrade in future.

According to Fitch, the major reason for this downgrade is Nokia's growing loss of market share in the low-end mobile handset segment and its inability to find a solution for a meaningful foothold in the high-end smartphone segment in the North American region. According to Fitch, the company's overall market share in the global mobile handset market fell to 28% in the third quarter of 2010 compared to 37% in the year-ago quarter.

We believe Nokia is trying hard, including replacement of its chief executive officer, operating system (OS) upgrade, and a series of new product launch to regain its competitive strength. Despite these, we remain concerned about the company's future catalysts. Nokia recently, upgraded its operating system. Nokia enriched the newly launched Symbian 3 platform with 250 new features and all its smartphones will be closely integrated with its Ovi services and applications supplied by its Navteq division. However, very recently management admitted that its flagship N8 series smartphones are facing a battery/power problem.

Nokia has also unveiled three new smartphones namely, E7, C7, and C6 that will join its flagship N8 smartphone. The Symbian 3-based smartphones are no doubt a huge improvement over the company's existing devices but none of these phones contain any feature which is unique in the market. We do not believe that any of these phones will generate any consumer hype in the lucrative North American markets.

Smartphones are generally characterized by powerful operating systems capable of supporting a variety of services and applications. The Symbian software has gradually lost charm among mobile phone users and is recognized as an out-of-date technology. Even the upgrade may not be a fitting reply from Nokia compared to the smoothness of Apple Inc's (AAPL) iOS, Google Inc's (GOOG) Andriod OS, and robustness of Research In Motion Ltd's (RIMM) BlackBerry OS.

Nokia is yet to provide any update about its next-generation Linux-based MeeGo operating system. MeeGo has been jointly developed by Nokia and Intel Corp. (INTC). This OS is basically a combination of Nokia's Meamo 5 and Intel's Moblin. More than 8 months after the announcement of this collaboration, Nokia is yet to provide any expected launch date for its first smartphone based on MeeGo. Nokia's earlier venture with its proprietary Linux-based Maemo 5 open-source software failed when its N900 smartphone did not find any meaningful market traction.

We maintain our long-term Neutral recommendation for Nokia. Currently it is a Zacks #3 Rank (Hold) stock.

 
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