Nokia

Some companies face headwinds. Nokia has been slouching into a gale. Apple’s move this week to make the iPhone available through Vodafone and Orange in the UK in addition to original mobile network partner O2 is the latest bad news for the Finnish group. As operators compete to lure iPhone customers, Nokia may have to lower prices to maintain market share, putting further pressure on operating margins that shrank to 12 per cent in the first half, down from 20 per cent in the second quarter of 2008.

Two years after Apple shook up the handset market with the launch of the iPhone, Nokia remains mired in a mess of its own making. Struggling at the high end, it faces a new threat at the low end from white-label manufacturers, which are preparing to roll out cut-price smartphones based on a new generation of low-cost chips. With little margin improvement expected in the second half, investors could be forgiven for wondering whether Nokia’s profitability is gone for good.

That may be overstating it. Nokia’s days of 20 per cent margins may be over but Bernstein thinks margins could edge up into the mid-teens next year, assuming no further deterioration in market share, as shipments bounce back and the company is able to use its huge scale to its advantage.

With a global market share of about 38 per cent, not much changed from its high of 41 per cent last year, Nokia is far from a broken company. Its recent investments in software and services – a key component of the iPhone’s appeal – are the right ones. But with those efforts unlikely to bear fruit before the end of next year, in the meantime it is hard to see much reason to prefer its shares over those of similarly rated peers.