Tech Stocks: Nokia (NYSE: NOK) Getting Squeezed in Smartphone Market

Nokia Corp. (NYSE ADR: NOK) shares were hammered today (Wednesday) after the company announced its continued smartphone market struggles would weigh on profits in 2012.

Nokia, the world's largest maker of cellphones by volume, warned that mobile phone sales will be weaker than forecast in the first quarter due to strong competition in fast-growing markets. After previously thinking it would break even, Nokia now predicts a 3% loss.

The word of warning highlights the steep challenges the Finnish cellphone maker faces in attempts to bolster its smartphone lineup. Cellphone devices and services account for up to 60% of Nokia's sales.

The latest lowered profit forecast is the second in less than a year, and the note of caution sent shares of Nokia plummeting to a 15-year low. Nokia last warned of falling profits in May 2011 due to its weak and diminishing presence in the ever-growing, highly contested smartphone market.

Now the company needs to figure out how to compete with the raging popularity of Apple Inc.'s (NASDAQ: AAPL) iPhone, while fending off competition among lower-end smartphone models running Google Inc.'s (NASDAQ: GOOG) Android operating system.

Nokia's Falling Smartphone Market Share

The company blames a number of factors for its gloomy outlook.

Nokia cited "competitive industry dynamics continuing to negatively affect the Smart Devices and Mobile Phone business units; timing; ramp-up; consumer demand related to new products; and the macroeconomic environments," as leading factors that will hurt profits this quarter.

While the iPhone has swept sales in the United States, Android models have become more popular in emerging markets. Nokia's cheaper, low-end phones used to thrive in these regions, but have faced pressure.

"The company shipped 12 million Smartphones, below our 16.2 million forecast," R.W. Baird's William Powers told Barron's. "The company cited macroeconomic weakness and tougher competitive dynamics, particularly in India, the Middle East, Africa and China. We would note that the iPhone 4s launched in many of those markets in late Q4 and early Q1, though low-end Android devices appear to be the biggest culprit."

The company also attributes the shortfall to a steep drop off in its Symbian platform, its legacy smartphone operating system currently being phased out. But Symbian users have abandoned the platform in droves.

Nokia had hoped the Symbian platform would help carry the company during its transition to Windows Phone.

CEO Stephen Elop said the company was attracting some support for its new line of phones based on Microsoft's Windows Phone operating system, including the Lumia 900 that just hit stores in the United States last Sunday. In fact, Nokia became the top-selling Windows Phone in 2011 (albeit there was very little competition in the Windows Phone market).

More than 2 million Lumias were sold in the first quarter, Nokia stated, and added that it has "seen sequential growth in Lumia device activations every month since."

While the new Lumia launch was widely embraced, it did not create anywhere near the buzz rival smartphone makers have caused with their new models.

But a technical glitch announced recently could kill Lumia 900 sales momentum. Some of the Lumia 900 phones are having trouble connecting to AT&T's data network. The companies acknowledged the problem and are removing defective devices from store shelves. But the damage to the brand will hurt Nokia, which is offering affected customers a $100 credit.

Analysts Neutral on NOK

Following Nokia's earnings warning Wednesday, Baird's Powers reiterated his "Neutral" rating on the stock, as did Nomura Equity Research's Stuart Jeffrey.

"We see a continued risk that Q2 proves weaker than even the new guidance implies," Jeffrey told Barron's. "Moreover, unless new feature phone models are an instant hit, there is a risk that Q3 will see another leg down in earnings."

Jeffrey said investors betting on Nokia rebounding on a Windows Phone turnaround could be sorely disappointed.

"Faster-than-expected declines in Symbian may just bring forward the bad news and allow any potential Windows Phone-based recovery to have an undiluted impact on company earnings," said Jeffrey.

Nokia outlined in Wednesday's conference call that it plans to expand its range of Lumia headsets and make "tactical pricing actions" to improve sales of its basic cellphones. The cost-cutting measures were not specified nor were the amount of the investments.

With some analysts slapping NOK with a "Neutral" rating, and another saying it may take a year to see if the company's turnaround plans are working, investors may do best by saying "no" to Nokia for now.

"I don't think it's fair to judge Nokia until the end of the year," Pete Cunningham, an analyst at England-based research firm Canalys, told The New York Times. "Then, we'll be able to see whether they make it or not."

Nokia is set to release financial results on April 19. NOK shares hit a 52-week low Wednesday of $4.20 on above-average volume, an indication many were hanging up on the stock. NOK closed down 15.7% at $4.24.

Related Articles and News:

• Money Morning:
  New Lumia 900 Smartphone to Breathe Life into Nokia (NYSE: NOK)

• Money Morning:
  Why Google Android Can't Compete With Apple's iPhone

• Money Morning:
  Growth in Google's Android Pays Off for InvenSense Inc. (NYSE: INVN)

• Barron's:
  Nokia Off 15%: Handsets Losing Money; Lumia Encouraging, Says Elop

• The New York Times:
  Nokia Lowers Estimate for First-Quarter Profit